FRM FRM Market Risk

Question 1

What does Value at Risk (VaR) measure at a 95% confidence level over a 1-day horizon?

Accepted Answer

The maximum loss not exceeded with 95% probability over one day

Answer

VaR at 95% confidence measures the maximum loss that will not be exceeded on 95% of days, meaning losses exceed this level only 5% of the time.

Question 2

Which of the following best describes Expected Shortfall (ES)?

Accepted Answer

The average of all losses beyond the VaR threshold

Answer

Expected Shortfall, also called Conditional VaR (CVaR), is the average loss conditional on the loss exceeding the VaR threshold.

Question 3

Under Basel III, what is the standard multiplier applied to the 10-day 99% VaR for market risk capital requirements?

Accepted Answer

3

Answer

Basel III requires banks to hold capital equal to at least 3 times the 10-day 99% VaR, subject to supervisory add-ons for backtesting exceptions.

Question 4

What is the primary limitation of historical simulation as a VaR method?

Accepted Answer

It assumes future market conditions mirror the historical window used

Answer

Historical simulation relies entirely on a historical data window, so it cannot capture risk scenarios outside that period.

Question 5

A bond portfolio has a DV01 of $5,000. If interest rates rise by 10 basis points, what is the approximate dollar loss?

Accepted Answer

$50,000

Answer

DV01 measures dollar value change per 1 basis point, so a 10 bp move results in 10 × $5,000 = $50,000 loss.

FRM Practice Test