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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A dealer has a two-way CSA with a client. Margin is called daily, and the margin period of risk (MPOR) is 10 business days. The dealer's exposure model assumes the portfolio value follows a normal distribution with a daily standard deviation of USD 1 million. The dealer wants initial margin at a one-sided 99% confidence level (z = 2.33) using the square-root-of-time rule. Approximately what initial margin should be required?

Initial margin is about 7.37 million. Scale the daily volatility of 1 million by the square root of 10 to get 3.162 million, then multiply by the 99% z-value of 2.33. Scaling linearly by 10 would wrongly give 23.3 million.

  1. AUSD 2.33 million
  2. BUSD 7.37 millionCorrect
  3. CUSD 23.3 million
  4. DUSD 5.40 million

Explanation

The 10-day standard deviation is 1 x sqrt(10) = 3.162 million. Multiplying by 2.33 gives 7.37 million. Using 2.33 alone ignores the 10-day horizon, and 23.3 scales linearly by 10 rather than by the square root.

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