FRM Part II · FRM Exam Part II · Fundamental Review of the Trading Book
Under the FRTB internal models approach, which risk measure replaced 99% Value-at-Risk as the basis for calculating trading book market risk capital?
FRTB uses expected shortfall at a 97.5% confidence level in place of 99% VaR. ES averages losses in the tail beyond the cutoff, so it captures tail severity and is coherent, whereas VaR ignores losses beyond its threshold.
- AExpected shortfall at a 97.5% confidence levelCorrect
- BExpected shortfall at a 99% confidence level
- CStressed VaR at a 99% confidence level
- DIncremental risk charge at a 99.9% confidence level
Explanation
FRTB replaces 99% VaR with expected shortfall calibrated at 97.5% confidence, which captures tail severity beyond the cutoff. Stressed VaR was a Basel 2.5 feature and is replaced, and the 99.9% incremental risk charge was also replaced by the default risk charge.
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