hard · FRM Part 1 Foundations of Risk Management
A firm aggregates two business units with standalone economic capital of $400 million and $600 million.
If the units are perfectly negatively correlated (ρ = -1), what is the aggregate capital, and is this state achievable between two distinct credit and market risk types?
- 200 million; No, perfect negative correlation is generally not possible between genuine risk types.
- 0 million; Yes, this is achievable through the use of synthetic hedging structures across desks.
- 1,000 million; No, because in this case the diversification benefit would simply be additive, not offsetting.
- 200 million; Yes, this is the standard simplifying assumption typically used throughout Enterprise Risk Management.
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