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

Under FRTB, risk factors that fail the modellability test are treated as non-modellable risk factors (NMRFs). Which statement correctly describes their capital treatment?

Non-modellable risk factors are excluded from the expected shortfall model and charged separately using a stress scenario capital requirement. This reflects that insufficient real price observations make them unsuitable for statistical modelling, so a conservative stress-based add-on is applied instead.

  1. AThey are excluded from ES and capitalised separately through a stress scenario capital add-onCorrect
  2. BThey are included in ES with a higher confidence level
  3. CThey are ignored if the desk passes backtesting
  4. DThey are capitalised using the delta-based standardised charge only

Explanation

NMRFs, which lack sufficient observable price data (real price observations), are removed from the ES model and capitalised through a stress scenario capital requirement calibrated to extreme stress. Raising ES confidence is not the approach, passing backtests does not exempt them, and the standardised delta charge is not the IMA treatment.

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