Answer-first summary for fast verification
Answer: The bank's model calculates interest rate risk based on the median duration of the bonds in the portfolio.
B is correct. In the case of bad luck, no penalty is given, as would be the case for a bank affected by unpredictable movements in rates or markets. However, when risk models are not precise enough, a penalty is typically given since model accuracy could have easily been improved.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
In the context of the Basel regulatory framework, what is the most likely reason for a bank to face a penalty if it has experienced more than four instances of breaching its 1-day 99% Value at Risk (VaR) threshold over the past 250 trading days?
A
A large move in interest rates occurs in conjunction with a small move in correlations.
B
The bank's model calculates interest rate risk based on the median duration of the bonds in the portfolio.
C
A sudden market crisis in an emerging market, which leads to losses in the equity positions in that country.
D
A sudden devastating earthquake that causes major losses in the bank's key area of operation.
No comments yet.