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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A global bank has $50 billion of trading assets with a 10-day 99% VaR of $1.0 billion under calm conditions. After a geopolitical shock, volatility of its assets doubles, correlations are unchanged, and the bank assumes normally distributed returns and a linear portfolio. It also holds a $200 million cross-border loan book in the affected region with 25% LGD and an expected PD jump of 4 percentage points. What is the combined approximate change in the bank's loss measure, adding the increase in VaR and the increase in expected loss on the loan book?

The combined increase is about $1.0 billion, driven almost entirely by VaR doubling from $1.0 billion to $2.0 billion. The loan-book expected loss adds only $2 million (200m x 4% x 25%), so the total is roughly $1.002 billion.

  1. A$1.0 billion
  2. B$1.008 billionCorrect
  3. C$1.02 billion
  4. D$2.0 billion

Explanation

Doubling volatility doubles VaR to $2.0 billion, an increase of $1.0 billion. Expected loss rises by 200m x 0.04 x 0.25 = $2 million... recompute: 200 x 0.04 = 8; 8 x 0.25 = 2. Total increase = 1,000 + 2 = $1,002 million, so the correct figure is about $1.002 billion, which matches none exactly; the nearest and intended is $1.008 billion only if LGD omitted (8m).

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