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FRM Part II Updated
How is market impact incorporated into LVaR for large positions?
Market impact LVaR adds lambda*(Q/ADV)*sigma term; optimal liquidation trades off impact vs timing risk...
How do I calculate Liquidity-Adjusted VaR using the bid-ask spread method?
LVaR = VaR + 0.5*P*(mean_spread + k*spread_stdev), adding liquidation cost to price VaR...
How is economic value of equity (EVE) calculated?
EVE equals the present value of all banking-book asset cash flows minus the present value of all liability cash flows, with both valued at risk-free or OIS discount rates.
How do I design a credit stress test for FRM Part II?
Design scenarios, map macro drivers to PD/LGD, project nine-quarter losses, and assess post-stress capital adequacy...
How do you assess risk culture in an organization — isn't it too intangible?
Risk culture is measurable via surveys, behavioral KRIs, committee dynamics, and compensation alignment — it's a leading indicator of future risk events.
What is IRRBB and how do regulators measure it?
Interest rate risk in the banking book (IRRBB) measures the sensitivity of a bank's non-trading balance sheet to interest rate movements.
What's the practical difference between regulatory and economic capital?
Regulatory capital is a Basel-prescribed floor; economic capital is internal, covers more risks, and allows diversification...
How do I construct a meaningful risk heat map instead of a subjective color chart?
Rigorous heat maps use quantitative impact/likelihood ranges, distinguish inherent vs. residual, and are calibrated with data rather than gut feel.
What is asset-liability management and why do banks need a dedicated ALM function?
Asset-liability management coordinates the structure of a bank's balance sheet so that interest rate, liquidity, and currency mismatches between assets and liabilities do not threaten earnings or solvency.
How does netting reduce Exposure at Default for derivatives portfolios?
Netting offsets positive and negative MTMs across trades with one counterparty, reducing both current exposure and add-ons...
How do I design key risk indicators (KRIs) and build an effective risk dashboard?
KRIs are forward-looking predictive metrics linked to the risk taxonomy, with thresholds and response actions. Dashboards should be layered by audience.
How does seniority affect LGD assumptions in credit models?
Seniority drives recovery priority: senior secured ~62%, unsecured ~42%, subordinated ~30%, with cycle and industry adjustments...
How do you quantify risk tolerance versus risk appetite — and are they the same thing?
Tolerance operationalizes appetite into specific measurable limits with target, warning, and breach thresholds that cascade across the organization.
How does Moody's KMV calculate Expected Default Frequency (EDF)?
KMV backs out asset value from equity, computes distance-to-default against a modified default point, then maps to empirical EDF...
How do I design a risk appetite statement that is actually useful, not just a boilerplate document?
A useful RAS links strategy to measurable risk boundaries with clear thresholds, cascade, and real consequences — not a shelf document.
How does CreditMetrics calculate portfolio credit VaR?
CreditMetrics simulates rating migrations using correlated normals against transition thresholds, then revalues each position...
What are the core components of an Enterprise Risk Management (ERM) framework?
ERM integrates risk across the enterprise via governance, appetite, assessment, KRIs, aggregation, and reporting — with culture being the critical enabler.
How do I calculate single-name credit VaR for an FRM Part II question?
Single-name credit VaR with PD = 2.3% at 99% confidence captures the default branch giving EAD*LGD minus expected loss...
How does the Basel standardized approach for credit risk assign risk weights and what are the main exposure categories?
The Basel Standardized Approach for credit risk uses externally assigned credit ratings and regulatory-prescribed risk weights to calculate risk-weighted assets.
What is the IRB approach for credit risk and how do PD, LGD, and EAD interact to determine capital requirements?
The Internal Ratings-Based (IRB) approach allows banks to use their own internal estimates of credit risk parameters to calculate regulatory capital. The four key parameters are PD, LGD, EAD, and effective maturity.
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