Skip to content

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

A risk manager at an asset manager wants stress scenarios that are plausible and anchored in observed market behavior rather than chosen purely by judgment. Which approach best reflects the market-driven scenario method?

The market-driven approach shocks a key risk factor and uses observed co-movement among factors, from historical or market-implied data, to determine the consistent moves in the others. This makes the scenario plausible, unlike isolated shocks, repeated worst days, or arbitrary management-chosen numbers.

  1. ASpecify a large shock to one risk factor and assume all other factors remain unchanged
  2. BUse historical and market-implied information on how risk factors co-move to derive the likely moves in other factors, given a stated shock to a key factorCorrect
  3. CSelect the worst single-day loss in the portfolio's history and repeat it for ten days
  4. DAsk senior management to assign arbitrary shocks to each factor so the scenario is severe

Explanation

Market-driven scenarios start from a shock to a chosen factor and use the observed statistical relationships among factors to infer the consistent moves in the rest. Holding other factors fixed ignores co-movement and is typically implausible. Repeating the worst day or using arbitrary shocks has no link to market-based dependence.

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