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CMA Final · Risk Management in Banking and Insurance · Market Risk Management

Backtesting of a bank's 99% one-day VaR model over 250 trading days shows 7 exceptions. Under the Basel traffic-light approach for internal models, in which zone does this fall?

Seven exceptions place the model in the yellow zone. Under the Basel traffic-light backtesting approach over 250 days, 0 to 4 exceptions is green, 5 to 9 is yellow and 10 or more is red. The yellow zone increases the multiplier applied to the capital charge.

  1. AGreen zone, with 0 to 4 exceptions
  2. BYellow zone, with 5 to 9 exceptionsCorrect
  3. CRed zone, with 7 or more exceptions
  4. DYellow zone, with 10 to 14 exceptions

Explanation

In the Basel backtesting traffic-light approach over 250 days, 0-4 exceptions is green, 5-9 yellow and 10 or more red. Seven exceptions is therefore yellow, which attracts a higher multiplier on the capital charge.

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