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

A trading desk holds options. Under the FRTB SBM, what is the main purpose of the curvature risk charge?

The curvature charge captures the extra loss from the nonlinear price response of options that a linear delta approximation misses. It is computed from stressed up and down shocks to risk factors and is additional to, not a replacement for, vega risk.

  1. ATo capture the incremental risk from the nonlinear price change of options not captured by deltaCorrect
  2. BTo capture the risk of issuer default on bonds held
  3. CTo replace vega risk for options with short maturities
  4. DTo measure liquidity horizons for each risk factor

Explanation

Curvature risk captures losses from price changes beyond the delta approximation, using up and down shocks to risk factors. It complements delta and vega rather than replacing vega, and default and liquidity horizon issues are handled elsewhere.

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