Financial Risk Manager Part 1
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The Chief Risk Officer (CRO) of an international banking corporation has assigned a group of risk analysts the responsibility of developing scenarios for an upcoming stress test. The analysts are currently deliberating on the common methodologies that financial institutions use to construct these scenarios. Among the following statements regarding the stress testing scenarios, which one is correct?
A
Scenarios that have not occurred in the past, but are created by assuming changes of a certain amount in key variables, are typically not used in stress testing.
B
Extremely adverse scenarios can be developed from moderately adverse periods in the past by multiplying movements in all risk factors by a certain amount, although this approach may fail to account for changes in correlations between these factors.
C
Historical scenarios of one day or one week in length are not useful in stress testing because such periods are not considered long enough to pose a meaningful threat to a bank's financial stability.
D
Senior management should leave the development of scenarios to risk managers and analysts who have the deepest knowledge of the risk exposures of the various business lines.