FRM Part I · FRM Exam Part I · Central Clearing
A CCP sets initial margin for a portfolio at the 99% confidence level using a 5-day margin period of risk. The portfolio's 1-day 99% loss estimate is 2.0 million, assuming returns are independent and identically distributed with zero mean. Using square-root-of-time scaling, what is the initial margin?
Initial margin is about 4.47 million. Under square-root-of-time scaling, the 1-day 99% loss of 2.0 million is multiplied by the square root of 5, roughly 2.236. Linear scaling would overstate the figure at 10 million.
- AAbout 4.47 millionCorrect
- BAbout 10.0 million
- CAbout 2.24 million
- DAbout 2.0 million
Explanation
Scale by the square root of 5: 2.0 x 2.236 = 4.47 million. Multiplying by 5 gives 10.0 million, which wrongly scales linearly. Using the 1-day figure ignores the longer liquidation period.
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