Exception

A day on which the actual loss exceeds the VaR forecast. The number of exceptions over a period is what a backtest counts.

Where you will meet it

Exception comes up in 18 learning outcome notes across the FRM syllabus. A few of them:

• Options Markets
  FRM Part I · Financial markets and products

  “Very large special dividends are the exception and are sometimes adjusted for.”

• Bond Yields and Return Calculations
  FRM Part I · Valuation and risk models

  “A zero-coupon bond is the exception, because y = (Face ÷ Price)^(1÷n) − 1.”

• Governance
  FRM Part II · Credit risk measurement and management

  “It tracks limit use, escalates breaches and exceptions, reviews the portfolio and has the framework reviewed.”

• Liquidity Transfer Pricing: A Guide to Better Practice
  FRM Part II · Liquidity and treasury risk measurement and management

  “Exceptions are documented and visible, and the prices feed product approval and performance measurement.”

See also

Backtesting

All terms beginning with E · FRM glossary

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