Banks develop statistical models to calculate their maximum loss over a given period. This approach is known as the ________.

Question

BlackTom AI · Accepted Answer

The question asks about a method banks use to estimate their maximum potential loss over a defined period, which points to a risk measurement technique that quantifies potential losses at a specified confidence level.
Option 1: value-at-risk approach. This is the standard term for the statistical method that estimates the maximum expected loss over a given horizon at a certain confidence level, aligning with the description in the question.
Option 2: stress-testing approach. Stress testing examines how extreme, but plausible, conditions would impact losses, but it does not by itself define the maximum loss over a period at a chosen probability; rather, it assesses resilience under scenarios.
Option 3: doomsday approach. This is not a formal banking risk measurement term and does not reflect a recognized methodology for quantifying maximum loss within a statistical model used in routine risk management.
Option 4: trading-loss approach. This is not a standard named approach in risk management for computing maximum loss; it lacks the formal statistical framing associated with VaR.
In summary, the description given—calculating maximum loss over a period using a statistical framework—best matches the value-at-risk approach, which provides a probabilistic bound on losses within a specified period.

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Banks develop statistical models to calculate their maximum loss over a given period. This approach is known as the ________.

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