Answer: The bank can choose to conduct an ex-post backtest on the stressed VaR only; if the test is successful, both multiplicative factors can be reduced to one.

## Explanation This question relates to the Basel market risk capital calculation framework, specifically the components of the market risk capital charge. **Analysis of each option:** - **Option A**: **TRUE** - This correctly describes the first term of the market risk capital calculation, which is the higher of the previous day's VaR and the 60-day average VaR, multiplied by a multiplication factor. - **Option B**: **TRUE** - This correctly describes the second term of the market risk capital calculation, which is the higher of the latest stressed VaR and the 60-day average stressed VaR, multiplied by a multiplication factor. - **Option C**: **TRUE** - This is correct. The multiplication factors \(m_c\) (for regular VaR) and \(m_s\) (for stressed VaR) are set by supervisory authorities with a minimum value of 3. - **Option D**: **FALSE** - This statement is incorrect. Banks cannot choose to conduct backtesting only on stressed VaR. Backtesting is required for regular VaR, not stressed VaR. Additionally, successful backtesting of regular VaR may allow for a reduction in the multiplication factor \(m_c\), but this does not apply to both factors. The stressed VaR multiplication factor \(m_s\) is typically fixed and not subject to reduction based on backtesting performance. **Key Points:** - The market risk capital charge = \(\text{VaR}_{t-1} + \text{Stressed VaR}_{t-1}\) - Backtesting applies to regular VaR, not stressed VaR - Multiplication factors have a regulatory minimum of 3 - Only the regular VaR multiplication factor can be reduced based on backtesting performance

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