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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

An analyst models a bank equity portfolio of USD 200 million. Under a high geopolitical risk regime, the 1-day 99% VaR, assuming normal returns, uses daily volatility of 1.5% versus 1.0% in the normal regime. Using z = 2.33 and rounding to the nearest USD 0.01 million, what is the increase in 1-day 99% VaR from the normal to the high-risk regime?

The increase is USD 2.33 million. Normal VaR is 2.33 x 1% x 200 = 4.66 million, and high-risk VaR is 2.33 x 1.5% x 200 = 6.99 million. The difference, 6.99 minus 4.66, equals 2.33 million.

  1. AUSD 2.33 millionCorrect
  2. BUSD 4.66 million
  3. CUSD 6.99 million
  4. DUSD 9.32 million

Explanation

Normal VaR = 2.33 x 1.0% x 200 = 4.66 million. High-risk VaR = 2.33 x 1.5% x 200 = 6.99 million. Increase = 6.99 - 4.66 = 2.33 million. 4.66 is the normal VaR only, 6.99 is the high-risk VaR level, and 9.32 is a doubled error.

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