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

Under the FRTB internal models approach, which risk measure replaces 99% VaR as the basis for calculating market risk capital for the trading book?

FRTB's internal models approach uses expected shortfall at a 97.5% confidence level instead of 99% VaR. This captures the average size of tail losses beyond the threshold, and under normality it is roughly comparable to 99% VaR, while being more sensitive to tail risk.

  1. AExpected shortfall calibrated to a 97.5% confidence levelCorrect
  2. BExpected shortfall calibrated to a 99% confidence level
  3. CStressed VaR at 99% with a 10-day horizon
  4. DIncremental risk charge at 99.9% confidence

Explanation

FRTB replaces 99% VaR and stressed VaR with expected shortfall at 97.5% confidence. For a normal distribution this gives a tail measure roughly similar to 99% VaR, but it captures the severity of losses beyond the cutoff. The 99% ES option uses the wrong confidence level.

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