FRM Flashcards

A portfolio has a one-day 99% VaR of $1 million. What does this figure most accurately represent?

Answer: The loss that will be exceeded on 1% of days

A 99% one-day VaR of $1M means losses should exceed $1M on only 1% of trading days.

Which risk measure, unlike VaR, satisfies the coherence property of subadditivity in all cases?

Answer: Expected Shortfall (CVaR)

Expected Shortfall is a coherent risk measure that always satisfies subadditivity, whereas VaR may not.

Under the Basel framework, which type of risk capital charge specifically addresses losses from inadequate internal processes, people, and systems?

Answer: Operational risk capital

Operational risk capital covers losses from failed internal processes, people, systems, or external events.

A bond's duration is 6 and its convexity is 80. For a 1% (0.01) rise in yields, the convexity adjustment to the price change is approximately:

Answer: +0.40%

The convexity adjustment is 0.5 × convexity × (Δy)² = 0.5 × 80 × 0.0001 = +0.40%.

Which Greek measures the rate of change of an option's delta with respect to the underlying price?

Answer: Gamma

Gamma measures how quickly delta changes as the underlying asset price moves.

In credit risk, the expected loss on an exposure is calculated as:

Answer: PD × LGD × EAD

Expected Loss equals Probability of Default times Loss Given Default times Exposure at Default.

Which type of backtesting exception would most concern a risk manager validating a VaR model?

Answer: Exceptions occur far more frequently than the confidence level implies

Too many exceptions relative to the model's confidence level signals the VaR model underestimates risk.