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.
Sign up free to see the explanation and track your rank →
More FRM Part 2 Market Risk practice
- The Hill estimator is primarily used to provide a direct estimate of which parameter?
- What is the base capital multiplier (m) applied to a bank's internal model market risk cap
- If a bank records 11 exceptions in a 250-day backtesting window for 99% VaR, what is the r
- What happens to the mean of a GPD-distributed variable if the tail index ξ ≥ 1?
- What is the maximum 'plus-factor' added to the base multiplier of 3.0 for a bank that reco
- Which fixed-income mapping technique treats a bond portfolio as a single zero-coupon bond
- What happens to the VaR estimate if we move from a thin-tailed (Gumbel, ξ = 0) model to a
- In the GPD framework, if the threshold u is chosen too low, what is the most likely error