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

Basel 2.5 introduced the stressed VaR requirement in response to losses in the 2007-2009 crisis. A bank's 10-day 99% VaR from current market data is USD 20 million and its stressed VaR from a 12-month stress period is USD 50 million. The latest 60-day averages are USD 18 million for VaR and USD 45 million for stressed VaR, and the multiplication factor mc is 3 for both. Ignoring other components, what is the VaR-based capital charge under the Basel 2.5 approach, which takes the higher of the latest value and the multiplied average for each measure?

The capital charge is USD 189 million. The VaR part is the larger of 20 and 3 times 18, which is 54, and the stressed VaR part is the larger of 50 and 3 times 45, which is 135. Adding them gives 189 million.

  1. AUSD 108 million
  2. BUSD 285 millionCorrect
  3. CUSD 70 million
  4. DUSD 189 million

Explanation

VaR component = max(20, 3×18=54) = 54. Stressed VaR component = max(50, 3×45=135) = 135. Sum = 54 + 135 = 189. Check: the answer is 189, so option 4 is correct and the key must be that one.

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