A RISK MANAGEMENT CONSULTANT IS INVOLVED IN EVALUATING THE CAPITAL...

18.

A risk management consultant is involved in evaluating the capital planning at a US-based bank holding

company (BHC) with over USD 100 billion in total consolidated assets. The evaluation includes looking at the

stress testing program that is integral to the capital planning process.

In evaluating the BHC's design of stress scenarios, which of the following statements is correct?

a.

Although the BHC may feel it is losing some of its independence, limiting the scenarios to those

developed by the Federal Reserve will ensure regulatory compliance.

b.

To avoid introducing bias, if the BHC uses private sector third-party-defined scenarios, they should be

implemented without alteration.

c.

In order to properly assess both right-way and wrong-way risk in stress environments, assumptions

should be included that specifically benefit the BHC.

d.

When developing scenarios internally, it is acceptable to combine expert judgment with quantitative

models rather than relying only on the models.

2015 Financial Risk Manager (FRM®) Practice Exam

Question 19 refers to the following information:

A profitable derivatives trading desk at a bank decides that its existing VaR model, which has been used broadly

across the firm for several years, is too conservative. The existing VaR model uses a historical simulation over a

three-year look-back period, weighting each day equally. A quantitative analyst in the group quickly develops a new

VaR model, which uses the delta normal approach. The new model uses volatilities and correlations estimated over

the past four years using the Riskmetrics EWMA method.

For testing purposes, the new model is used in parallel with the existing model for four weeks to estimate the