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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

A fund has USD 500 million of capital and a stress scenario produces a portfolio loss of USD 60 million. The fund's capital plan requires post-stress capital to be at least 85% of current capital. Prime broker margin calls in the same scenario drain a further USD 20 million of capital through forced liquidation costs. Is the capital plan requirement met?

The requirement is not met. The minimum is 85% of USD 500 million, or USD 425 million. Combined losses of USD 60 million and liquidation costs of USD 20 million leave USD 420 million, which falls short. Ignoring the liquidation costs would wrongly suggest compliance.

  1. AYes, post-stress capital is USD 440 million, above the USD 425 million minimum
  2. BNo, post-stress capital is USD 420 million, below the USD 425 million minimumCorrect
  3. CYes, post-stress capital is USD 480 million, above the minimum
  4. DNo, post-stress capital is USD 440 million, below the USD 450 million minimum

Explanation

Minimum = 0.85 x 500 = 425 million. Total stress impact = 60 + 20 = 80 million, leaving 420 million, which is below 425 million. Ignoring the liquidation costs gives 440 million and wrongly passes the test.

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