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

Under the FRTB SbM, the bank computes the capital for a risk class under three correlation scenarios and applies a prescribed rule. Which statement is correct?

The capital for each risk class is the maximum of the charges under the low, medium and high correlation scenarios. Prescribed correlations are scaled up and down to build the scenarios, and taking the largest reflects uncertainty about how correlations behave in stress. It is not an average or a bank choice.

  1. ACapital is the average of the low, medium and high correlation scenario charges
  2. BCapital is the charge under the medium correlation scenario only
  3. CThe bank chooses the scenario that best reflects its own correlation estimates
  4. DCapital is the maximum of the charges under the low, medium and high correlation scenariosCorrect

Explanation

Delta, vega and curvature charges are computed under medium, high and low correlation scenarios, with the high and low obtained by scaling the prescribed correlations up and down. The final risk-class charge is the largest of the three, which adds conservatism against correlation breakdowns.

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