Skip to content

FRM Part II · FRM Exam Part II · Market-Driven Scenarios: An Approach for Plausible Scenario Construction

Which statement best describes the main role of scenario analysis alongside VaR in a risk management framework?

Scenario analysis complements VaR by showing losses in extreme but plausible events that models calibrated to normal market conditions may miss. It does not replace VaR or supply precise probabilities, and it is useful for hedging and limit decisions as well as for regulatory purposes.

  1. AIt replaces VaR because VaR cannot be computed for stressed markets
  2. BIt complements VaR by examining losses in extreme but plausible events that statistical models calibrated to normal conditions may not captureCorrect
  3. CIt provides the probability of each extreme event so that expected shortfall is unnecessary
  4. DIt is used only to satisfy regulators and has no value for portfolio decisions

Explanation

VaR is calibrated mostly on typical historical data and says little about tail events. Scenario analysis examines specific extreme yet plausible events, so it complements VaR and informs decisions such as hedging and limits. It does not replace VaR or assign precise probabilities.

Did you get it right without looking?

One question tells you little. A timed set on Market-Driven Scenarios: An Approach for Plausible Scenario Construction shows your real accuracy, how long you take and where you lose marks.

Practise Market-Driven Scenarios: An Approach for Plausible Scenario ConstructionFree diagnostic mock

More Market-Driven Scenarios: An Approach for Plausible Scenario Construction questions