Skip to content

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

A fund's board approves a risk appetite statement with a 12% annual VaR budget. The CRO sets an amber early-warning trigger at 10% and a hard limit at 12%. The portfolio's VaR rises to 10.8% following a volatility spike, with no limit breach. Which response best fits a well-designed framework?

The trigger breach should be escalated to the risk committee for review of drivers and agreed pre-defined actions. Early-warning levels exist to permit action before the hard limit is reached; ignoring them or loosening limits under stress undermines the appetite framework.

  1. AEscalate to the risk committee, review drivers and agree on pre-defined actions, while the limit remains unbreachedCorrect
  2. BDo nothing, since only breaches of the hard limit require any action
  3. CImmediately raise the hard limit to 14% to avoid forced selling
  4. DRemove the amber trigger because it creates unnecessary alerts

Explanation

Early-warning triggers exist so that management can act before the hard limit is hit. At 10.8% the amber trigger is exceeded, so escalation and review are required. Raising limits in response to stress defeats the purpose of appetite governance and requires board approval and reasoning, not convenience.

Did you get it right without looking?

One question tells you little. A timed set on Risk, Regulation and Organizational Structure shows your real accuracy, how long you take and where you lose marks.

Practise Risk, Regulation and Organizational StructureFree diagnostic mock

More Risk, Regulation and Organizational Structure questions