Module: | MODULE B: RISK MANAGEMENT
Q339: Consider the following statements regarding the latest Fundamental Review of the Trading Book (FRTB) standards for market risk capital adequacy:
1. The Sensitivities-based Method (SbM) under the standardized approach strictly captures market risks across Delta, Vega, and Curvature risk dimensions.
2. The Default Risk Charge (DRC) is calculated exclusively for equity exposures and intentionally ignores the default risk of fixed-income corporate bonds.
3. The FRTB framework introduces a Residual Risk Add-on (RRAO) to capture complex risks that are not fully covered by the standard Sensitivities-based Method.
2. The Default Risk Charge (DRC) is calculated exclusively for equity exposures and intentionally ignores the default risk of fixed-income corporate bonds.
3. The FRTB framework introduces a Residual Risk Add-on (RRAO) to capture complex risks that are not fully covered by the standard Sensitivities-based Method.
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: Under the FRTB standardized approach, the Sensitivities-based Method (SbM) is the core calculation engine, capturing risks across three specific dimensions: Delta (linear risk), Vega (volatility risk), and Curvature (non-linear risk). Statement 3 is correct: The Residual Risk Add-on (RRAO) is specifically introduced to capture exotic and complex risks (e.g., complex weather derivatives or longevity risk) that fall outside the purview of the standard SbM.
Statement 2 is incorrect: The Default Risk Charge (DRC) captures the jump-to-default risk of BOTH equities and fixed-income products (like corporate bonds and structured credit). It absolutely does not ignore fixed-income default risk; in fact, bonds are its primary target.
Statement 2 is incorrect: The Default Risk Charge (DRC) captures the jump-to-default risk of BOTH equities and fixed-income products (like corporate bonds and structured credit). It absolutely does not ignore fixed-income default risk; in fact, bonds are its primary target.