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FRM Part I · FRM Exam Part I · Measures of Financial Risk

Over 250 trading days, a bank's one-day 99% VaR model is exceeded on 8 days. Assuming the model is correctly calibrated, how many exceptions would be expected, and what does the result suggest?

A correctly calibrated 99% model would be expected to produce 2.5 exceptions in 250 days. Observing 8 is considerably higher, suggesting the VaR model may be underestimating risk rather than being conservative.

  1. A2.5 expected; the observed count is above expectation, suggesting VaR may be understatedCorrect
  2. B2.5 expected; the observed count is below expectation, suggesting VaR is overstated
  3. C8 expected; the model is perfectly calibrated
  4. D25 expected; the model is overly conservative

Explanation

Expected exceptions = 1% × 250 = 2.5. Observing 8 is well above this, which indicates the model may underestimate risk. The other options give wrong expected counts or reverse the direction.

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