Skip to content

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

After running a market-driven scenario, a risk manager finds that most of the portfolio loss comes from a single position with a concentrated exposure to the shocked variable. Which action best reflects sound use of the results?

The manager should break the loss down by position and risk factor, judge whether the concentration is intended, and consider hedges or limit adjustments. Scenario results are most useful for revealing loss drivers, so hiding them in an aggregate or shrinking the shock would defeat the purpose.

  1. AReport only the aggregate portfolio loss since position-level results are noisy
  2. BDecompose the loss by position and risk factor, assess whether the concentration is intended, and consider hedging or limit changesCorrect
  3. CRerun the scenario with a smaller shock until the loss falls within limits
  4. DReplace the scenario with a VaR number to avoid concentration findings

Explanation

Scenario analysis is valuable for revealing drivers of loss. Decomposing by position and factor identifies concentrations and supports hedging or limit decisions. Shrinking the shock to meet limits defeats the purpose, and VaR does not replace scenario insight.

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