FRM Part II · FRM Exam Part II · Market-Driven Scenarios: An Approach for Plausible Scenario Construction
A portfolio has exposures to two risk factors. A scenario shocks Factor A by -10%, and the estimated conditional relationship implies Factor B moves by 0.6 times Factor A's move. The portfolio loses 2.0 per 1% fall in Factor A and 1.5 per 1% fall in Factor B (linear sensitivities). What is the scenario loss?
The scenario loss is 29.0. Factor A's 10% fall costs 20, and the implied 6% fall in Factor B (0.6 times A's move) costs a further 9. Ignoring the implied move in B would understate the loss at 20.
- A29.0Correct
- B20.0
- C9.0
- D38.0
Explanation
Factor B shock = 0.6 × (-10%) = -6%. Loss from A = 10 × 2.0 = 20. Loss from B = 6 × 1.5 = 9. Total = 29.0. Ignoring the implied B move gives 20, the key mistake.
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