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FRM Part II · FRM Exam Part II · Market-Driven Scenarios: An Approach for Plausible Scenario Construction

A portfolio has exposure to two risk factors: equities (sensitivity of USD 2 million loss per 1% fall) and credit spreads (USD 0.5 million loss per 10 bp widening). In a scenario, equities fall 20%. Using a linear relationship estimated from market data, spreads widen by 15 bp for every 10% equity fall. What is the total scenario loss, assuming linear sensitivities?

The total loss is USD 41.5 million: equities contribute USD 40 million (20 x 2), and the implied 30 bp spread widening adds USD 1.5 million (3 x 0.5).

  1. AUSD 40 million
  2. BUSD 41.5 million
  3. CUSD 43.0 millionCorrect
  4. DUSD 44.5 million

Explanation

Equity loss = 20 x 2 = USD 40 million. Spreads widen 15 x 2 = 30 bp, loss = 30/10 x 0.5 = USD 1.5 million. Total = USD 41.5 million.

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