Explanation:
The FRTB has proposed a change from the previous measure used for determining market risk capital. The Basel I calculations of market risk capital were based on a value at risk (VaR) calculated for a 10-day horizon with a 99% confidence level. However, the FRTB is proposing a shift to expected shortfall (ES) with a 97.5% confidence level. Expected shortfall is a risk measure that quantifies the expected value of loss given that a certain threshold is exceeded. In this case, the threshold is set at a 97.5% confidence level. This means that the ES measures the expected loss that will occur with a 2.5% probability. This measure is considered to be more accurate and reliable in capturing tail risk, which refers to the risk of extreme financial changes. Therefore, the FRTB’s proposed change is aimed at enhancing the accuracy and reliability of risk assessments in the financial markets.
Choice A is incorrect. Value at Risk (VaR) at 99% confidence level was the measure used in the previous approach for determining market risk capital. The FRTB has proposed a shift from this measure to enhance the accuracy and reliability of risk assessments.
Choice B is incorrect. VaR at 99.99% confidence level is not the new measure proposed by FRTB for calculating market risk capital. This choice represents an extreme tail event which may not be practical or realistic for regular market conditions.
Choice D is incorrect. Expected shortfall with a 99% confidence level, while it does represent a more conservative approach than VaR, it's not the specific measure that FRTB has proposed for calculating market risk capital.
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Q.2368 Which of the following presents FRTB's (Fundamental Review of the Trading Book) proposed change during the measurement of market risk capital?
A
VaR at 99% confidence
B
VaR at 99.99% confidence
C
Expected shortfall with a 97.5% confidence level
D
Expected shortfall with a 99% confidence level