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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

A firm has equity capital of USD 800 million. Its board states that the one-year 99% economic capital need from all risks must not exceed 60% of equity. Current estimated economic capital usage is USD 420 million. How much additional economic capital can be consumed before the appetite limit is reached?

The appetite limit is 60% of USD 800 million, or USD 480 million. With USD 420 million already used, the remaining headroom is USD 60 million. Subtracting usage from total equity ignores the board's stated limit and gives a wrong figure.

  1. AUSD 60 millionCorrect
  2. BUSD 380 million
  3. CUSD 120 million
  4. DUSD 48 million

Explanation

Limit = 0.60 × 800 = USD 480 million. Headroom = 480 − 420 = USD 60 million. USD 380 million wrongly subtracts usage from total equity (800 − 420), ignoring the 60% appetite limit. USD 120 million is 480 minus 360, an arithmetic slip, not a valid figure.

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