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FRM Part I · FRM Exam Part I · Central Clearing

A CCP sets initial margin for a portfolio using a 99% one-day VaR of 2.0 million and scales it to a 5-day margin period of risk using the square-root-of-time rule. What is the initial margin, rounded to the nearest thousand?

Initial margin is about 4,472,000. Under square-root-of-time scaling, the one-day 99% VaR of 2.0 million is multiplied by the square root of 5, roughly 2.236, to reflect the five-day margin period of risk. Linear scaling by 5 would overstate the margin.

  1. A4,472,000Correct
  2. B10,000,000
  3. C2,000,000
  4. D8,944,000

Explanation

Scale by sqrt(5) = 2.23607. 2.0 million x 2.23607 = 4.472 million. Option B multiplies by 5 (linear scaling). Option C applies no scaling. Option D wrongly multiplies by 2 x sqrt(5)... it doubles the correct answer.

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