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

Under Basel 2.5, which pair of additional capital charges was introduced to supplement the 10-day 99% VaR charge for the trading book?

Basel 2.5 added stressed VaR and the Incremental Risk Charge. Stressed VaR captures losses using inputs from a period of significant financial stress, while the IRC captures default and rating migration risk in credit positions at a one-year, 99.9% horizon.

  1. AStressed VaR and the Incremental Risk ChargeCorrect
  2. BExpected shortfall and the default risk charge
  3. CStressed VaR and the residual risk add-on
  4. DIncremental Risk Charge and the credit valuation adjustment charge

Explanation

Basel 2.5 added stressed VaR, calibrated to a 12-month period of significant stress, and the Incremental Risk Charge for default and migration risk of unsecuritised credit products. Expected shortfall, the default risk charge and residual risk add-on belong to FRTB. CVA was a separate Basel III addition.

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