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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

Which of the following is the most appropriate way for a firm to translate a board-level risk appetite statement into day-to-day control?

The firm should cascade the board's risk appetite into specific limits and tolerances for business units and desks that are consistent with it, and monitor and escalate breaches. This links strategy to daily risk-taking, unlike ad hoc or reactive approaches.

  1. ASet risk limits and tolerances for business units that are consistent with the appetite and monitor themCorrect
  2. BLeave each trader to set personal limits based on past profits
  3. CReview the appetite statement only when a loss exceeds capital
  4. DReplace the statement with a single firmwide VaR figure published externally

Explanation

Appetite must be cascaded into limits and tolerances by business line, desk and risk type, with monitoring and escalation. Ad hoc, reactive or single-metric approaches do not link strategy to daily decisions.

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