FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk
A bank outsources a service whose failure costs an estimated USD 2.0 million per incident. Before enhanced monitoring, the annual incident probability was 20%. Enhanced monitoring costing USD 150,000 per year reduces the probability to 12% (loss size unchanged). Assuming expected loss is the only benefit, what is the net annual benefit of the monitoring?
The net annual benefit is USD 10,000. Expected loss falls from 400,000 to 240,000, a saving of 160,000, and subtracting the 150,000 monitoring cost leaves 10,000. Ignoring the cost would overstate the benefit at 160,000.
- AUSD 10,000Correct
- BUSD 160,000
- CUSD 250,000
- DUSD 400,000
Explanation
Expected loss before = 0.20 x 2.0m = 400,000; after = 0.12 x 2.0m = 240,000. Reduction = 160,000. Net benefit = 160,000 - 150,000 = 10,000. The 160,000 option ignores the monitoring cost.
Did you get it right without looking?
One question tells you little. A timed set on Guidance on Managing Outsourcing Risk shows your real accuracy, how long you take and where you lose marks.
More Guidance on Managing Outsourcing Risk questions
- A bank's contract with an outsourced data-processing provider is approaching a dispute. Which clause most helps ensure the bank can continue…
- A bank is assessing an exit from a critical outsourced service. Which finding would most strongly indicate that the exit strategy is not cre…
- A bank outsources a critical function and the provider subcontracts part of it to a fourth party. Which contract design best manages the res…
- A risk manager is listing the main drivers behind a bank's growing use of outsourcing. Which of the following is most commonly cited as a dr…
- A bank relies on five critical outsourced services. Four are supplied by Vendor A, and Vendor A hosts its systems with a cloud provider that…
- A bank is negotiating a contract with a cloud service provider to host a critical payments application. Which contractual provision most dir…