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FRM Part II · FRM Exam Part II · Fundamental Review of the Trading Book

A risk factor fails the FRTB modellability assessment under the internal models approach because it lacks enough real price observations. How is it treated in capital?

A non-modellable risk factor is excluded from the expected shortfall model and capitalised separately through the stress scenario capital requirement. This add-on is conservative because the factor lacks sufficient observable price data for reliable modelling.

  1. AIt is excluded from ES and capitalised separately through a stressed capital add-onCorrect
  2. BIt is included in ES using proxy data with no extra charge
  3. CIt is capitalised using 99% VaR scaled by three
  4. DIt is ignored because non-modellable factors carry no capital

Explanation

Non-modellable risk factors are removed from the ES model and capitalised by the stress scenario capital requirement (SES), a separate add-on based on a stress calibrated to extreme conditions.

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