FRM Part II · FRM Exam Part II · Introduction to Credit Risk Modeling and Assessment
A portfolio has expected loss of $12 million. Its 99.9% one-year credit VaR, measured as the 99.9th percentile of the loss distribution, is $87 million. A risk manager wants the economic capital for unexpected losses at that confidence level. What is the capital figure under the standard definition?
Economic capital is credit VaR measured relative to expected loss: $87 million minus $12 million equals $75 million. Expected losses are covered by pricing and provisions, so capital is held only for the unexpected portion of the tail loss.
- A$75 millionCorrect
- B$87 million
- C$99 million
- D$7.25 million
Explanation
Economic capital covers unexpected loss, defined as the quantile loss minus expected loss: 87 − 12 = $75 million. Using the full $87 million ignores that expected loss is covered by provisions and pricing. Adding EL gives $99 million, a sign error.
Did you get it right without looking?
One question tells you little. A timed set on Introduction to Credit Risk Modeling and Assessment shows your real accuracy, how long you take and where you lose marks.
More Introduction to Credit Risk Modeling and Assessment questions
- A bank compares through-the-cycle (TTC) and point-in-time (PIT) rating systems. Which outcome is most consistent with a TTC system during a …
- Which statement about expected loss and unexpected loss in credit risk measurement is correct?
- Two loans each have EAD of $1 million, constant LGD of 100%, and PD of 10%, so each has a loss standard deviation of $300,000. The default c…
- A bank compares through-the-cycle (TTC) ratings from an agency with point-in-time (PIT) ratings from its internal model. During a sharp econ…
- A bank uses a scorecard that was developed on data from a benign economic period. Management wants to know whether the model's predicted def…
- A bank lends USD 5 million to a corporate borrower. The one-year probability of default is 2%, the loss given default is 45%, and the exposu…