In the context of the Basel Committee guidelines for backtesting 1-day 99% Value at Risk (VaR) models over the past 250 trading days, which of the following scenarios would likely result in disciplinary action if a bank exceeds the permissible threshold of four exceptions?

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A large move in interest rates occurs in conjunction with a small move in correlations.

11.1%

The bank's model calculates interest rate risk based on the median duration of the bonds in the portfolio.

83.3%

A sudden market crisis in an emerging market, which leads to losses in the equity positions in that country.

5.6%

A sudden devastating earthquake that causes major losses in the bank's key area of operation.

0.0%

Financial Risk Manager Part 2