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FRM Part II · FRM Exam Part II · Credit Value at Risk

A portfolio has expected loss of USD 12 million, and the 99.9% credit VaR from a CreditRisk+ model is USD 95 million. The bank wants the amount of economic capital needed to cover unexpected losses at that confidence level. What is it?

Economic capital is USD 83 million. Credit VaR at 99.9% is USD 95 million, and subtracting the USD 12 million expected loss, which is covered by provisions and pricing, leaves the unexpected loss that capital must absorb.

  1. AUSD 83 millionCorrect
  2. BUSD 95 million
  3. CUSD 107 million
  4. DUSD 12 million

Explanation

Economic capital is VaR less expected loss: 95 − 12 = 83 million, since expected loss is covered by provisions and pricing. 95 ignores the subtraction, 107 adds EL by mistake, and 12 is only the expected loss.

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