FRR Preparation (Financial Risk and Regulation)

📊 VaR vs Economic Capital — Understanding the Difference Both Value at Risk (VaR) and Economic Capital (EC) are key tools in Financial Risk Management (FRR) , but they serve different purposes in assessing and managing risk. 🔹 Value at Risk (VaR) Definition: VaR estimates the maximum expected loss over a specific time horizon, at a given confidence level, under normal market conditions . Example: A 99% one-day VaR of ₹10 million means there’s only a 1% chance the firm will lose more than ₹10 million in a day. Key Features: Time horizon: Usually 1 day to 10 days Confidence level: Typically 95% or 99% Purpose: Market risk measurement and daily risk limit setting Usage: Regulatory capital under Basel II/III for trading book Limitations: VaR doesn’t capture extreme tail losses beyond the chosen confidence level — hence not always sufficient for capital adequacy. 🔹 Economic Capital (EC) Definition: Economic Capital represents the amount of capital a firm needs to ...

🧱 Three Lines of Defence in Financial Risk Management (FRR Concept Explained) In the world of Financial Risk Management (FRR) , one of the most essential frameworks every GARP FRM aspirant must understand is the Three Lines of Defence Model . It forms the backbone of how financial institutions like banks, asset managers, and insurance companies manage and control risk effectively. Let’s decode this concept in simple, exam-ready language 👇 🔹 First Line of Defence — Business & Frontline Management The first line of defence represents the business units that take and manage risk on a day-to-day basis. These are the teams directly involved in revenue-generating activities , such as trading desks, lending departments, and investment teams. They are responsible for: Identifying and managing risks in their processes Implementing internal controls Ensuring compliance with the Risk Appetite Framework (RAF) 💡 Example: A trading desk ensuring position limits are not breached...