Financial Risk Manager Part 2

Get started today

Ultimate access to all questions.

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?

Exam-Like

Explanation:

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.