
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.
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A
A large move in interest rates occurs in conjunction with a small move in correlations.
B
The bank's model calculates interest rate risk based on the median duration of the bonds in the portfolio.
C
A sudden market crisis in an emerging market, which leads to losses in the equity positions in that country.
D
A sudden devastating earthquake that causes major losses in the bank's key area of operation.
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