Skip to content

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

A portfolio has exposures to two factors, A and B. The scenario sets A's shock at -5.0%. A has volatility 2.5% and B has volatility 4.0%. The correlation is 0.40. The portfolio gains 8 million for each +1% move in A and loses 3 million for each +1% move in B. Using the conditional expected shock for B, what is the expected scenario P&L, in millions?

The expected scenario P&L is -30.4 million. B's conditional shock is 0.40 × (4.0/2.5) × -5% = -3.2%. A contributes 8 × -5 = -40 million, and B contributes -3 × -3.2 = +9.6 million because the portfolio is short B. Summing gives -30.4 million.

  1. A-40.0 million
  2. B-26.4 million
  3. C-13.6 millionCorrect
  4. D-30.4 million

Explanation

B's conditional shock = 0.40 × (4.0/2.5) × (-5%) = -3.2%. P&L from A = 8 × (-5) = -40. P&L from B = -3 × (-3.2) = +9.6. Total = -40 + 9.6 = -30.4 million. Check: the -26.4 option comes from using -2.4%... no; correct is -30.4. Option -30.4 million is therefore correct and the answer index must reflect this.

Did you get it right without looking?

One question tells you little. A timed set on Market-Driven Scenarios: An Approach for Plausible Scenario Construction shows your real accuracy, how long you take and where you lose marks.

Practise Market-Driven Scenarios: An Approach for Plausible Scenario ConstructionFree diagnostic mock

More Market-Driven Scenarios: An Approach for Plausible Scenario Construction questions