medium · FRM Part 2 Market Risk
Compare the 'Actual P&L' and 'Hypothetical P&L' used in Basel backtesting.
If a model has 0 exceptions against Hypothetical P&L but 6 exceptions against Actual P&L, what is the most likely conclusion about the risk model?
- The model passes overall, since Basel only requires either the Actual or Hypothetical test to be satisfied.
- The VaR model is structurally broken and is failing to capture the material risk factors driving the portfolio's true exposure.
- The model is overly conservative, tying up excess regulatory capital that could be deployed elsewhere by the bank.
- The exceptions are likely driven by intraday trading activity or fees/commissions not captured by the VaR model.
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