FRM Part I · FRM Exam Part I · Stress Testing
A trading desk holds a long position of USD 40 million in equities with a beta of 1.2 to the market index and a USD 25 million long position in investment-grade corporate bonds with a spread DV01 of USD 9,000 per basis point. A stress scenario assumes the equity index falls 20% and credit spreads widen by 150 basis points, with no other effects. What is the total scenario loss?
The total loss is USD 10.95 million. Equities lose 40 million times beta 1.2 times 20%, which is 9.6 million, and the bonds lose 9,000 times 150 basis points, which is 1.35 million. Adding the two gives 10.95 million.
- AUSD 9.6 million
- BUSD 10.95 millionCorrect
- CUSD 14.95 million
- DUSD 1.35 million
Explanation
Equity loss = 40 million x 1.2 x 20% = 9.6 million. Credit loss = 9,000 x 150 = 1.35 million. Total = 10.95 million. Reporting only the equity loss (9.6) omits credit; 14.95 would wrongly ignore beta and add a larger figure; 1.35 omits equities.
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