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

After applying a set of market-driven scenarios, a risk committee sees one scenario producing the largest loss, concentrated in a single desk. What is the most appropriate use of this result?

The committee should use the result to identify the desk's vulnerability and consider limits or hedges, while recognizing the scenario has no formal probability attached and is not a worst-case bound or a VaR-style estimate.

  1. ATreat the loss as a statistical confidence-level estimate like VaR
  2. BUse it to identify the vulnerability and consider limits or hedges, while recognizing it has no attached probabilityCorrect
  3. CDiscard it because scenarios cannot be compared across desks
  4. DAssume the loss is the worst possible outcome

Explanation

Scenario results show vulnerability to a plausible event and guide limits and hedging, but they carry no formal probability and are not a worst-case bound.

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