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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A firm's risk appetite statement sets a maximum 99% one-day VaR of USD 20 million for the trading division as a hard limit, with an internal early-warning trigger at 80% of that limit. The division's VaR is currently USD 17.2 million. Which description best fits the situation?

The early-warning trigger is 80% of USD 20 million, which is USD 16 million. Current VaR of USD 17.2 million exceeds that trigger but remains below the USD 20 million hard limit, so the division is within its limit yet must be escalated under the framework.

  1. AThe division has breached the hard limit and must reduce risk immediately
  2. BThe division is within the hard limit but has crossed the early-warning trigger, requiring escalation under the frameworkCorrect
  3. CThe division is below the trigger because 17.2 is less than 20
  4. DThe trigger cannot be assessed without knowing the division's profit

Explanation

The trigger is 0.80 × 20 = USD 16 million. VaR of USD 17.2 million exceeds 16 million but is below the 20 million hard limit. So the division has crossed the early-warning level and should be escalated, although the hard limit is not breached. Comparing only with 20 million ignores the trigger.

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