Skip to content

FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A firm's board sets a risk appetite of a maximum 1-year 99% economic capital usage of USD 400 million. The chief risk officer (CRO) reports current usage of USD 380 million, and a planned expansion would add USD 45 million of standalone capital, with a diversification benefit of USD 15 million against the existing portfolio. What is the pro forma capital usage, and how does it compare with appetite?

Pro forma capital usage is USD 410 million, calculated as 380 plus 45 minus the 15 million diversification benefit. This exceeds the USD 400 million appetite by USD 10 million, so the expansion would breach the board's limit unless it is reduced or other risk is cut.

  1. AUSD 410 million, exceeding appetite by USD 10 millionCorrect
  2. BUSD 425 million, exceeding appetite by USD 25 million
  3. CUSD 440 million, exceeding appetite by USD 40 million
  4. DUSD 395 million, within appetite with USD 5 million headroom

Explanation

Pro forma usage = 380 + 45 - 15 = 410 million. Appetite is 400 million, so the breach is 10 million. Ignoring diversification gives 425 million, and that is the key error in the second option.

Did you get it right without looking?

One question tells you little. A timed set on Enterprise Risk Management and Future Trends shows your real accuracy, how long you take and where you lose marks.

Practise Enterprise Risk Management and Future TrendsFree diagnostic mock

More Enterprise Risk Management and Future Trends questions