The correct answer is C.

The intern's statement that the Fundamental Review of the Trading Book (FRTB) requires the addition of a stressed Value at Risk (VaR) measure to supplement the expected shortfall calculation is incorrect. Under the FRTB, banks are no longer required to combine the 10-day VaR and the 250-day stressed VaR risk measures. Instead, they are mandated to calculate capital based solely on the expected shortfall using a 250-day stressed period. This change was made to better capture tail risk and to provide a more comprehensive measure of risk. However, it's important to note that banks still retain the discretion to self-select a 250-day window of extreme financial stress. This flexibility allows banks to tailor their risk management strategies to their specific risk profiles and market conditions.

Choice A is incorrect. Both Basel I and Basel II.5 do indeed require the calculation of Value at Risk (VaR) with a 99% confidence interval. This is a standard requirement for market risk capital computation under these frameworks.

Choice B is incorrect. The FRTB does require the calculation of expected shortfall with a 97.5% confidence interval, not VaR as in previous Basel accords. Expected shortfall measures the risk of extreme losses beyond VaR, making it more sensitive to events in the tail of the loss distribution.

Choice D is incorrect. The statement about the 10-day time horizon for market risk capital under Basel I incorporating a recent period of time, typically ranging from one to four years, is accurate as well. This reflects how market risk capital computations take into account recent fluctuations in market conditions.

Things to Remember

• Basel I, Basel II, and Basel III are international banking regulations that set capital requirements for banks to ensure financial stability.
• Value at Risk (VaR) is a statistical measure used to quantify the level of financial risk within a firm or portfolio over a specific time frame.
• Expected shortfall, also known as Conditional VaR, is a risk measure that calculates the average of all losses beyond the VaR threshold.
• The Fundamental Review of the Trading Book (FRTB) was introduced to address shortcomings in the market risk framework and improve risk management practices.
• Stressed VaR is a measure that assesses the impact of extreme market conditions.