FRM Part I · FRM Exam Part I · Operational Risk
A bank uses a Monte Carlo LDA with 100,000 simulated years. The simulated aggregate annual losses are sorted, and the 99.9th percentile is USD 180 million. The mean simulated annual loss is USD 40 million. Under a capital definition covering unexpected loss only, what capital figure results at the 99.9% confidence level?
Capital for unexpected loss is the 99.9th percentile minus the expected loss: 180 − 40 = USD 140 million. Using USD 180 million would cover expected losses as well, which assumes none are covered by provisions or pricing.
- AUSD 220 million
- BUSD 140 millionCorrect
- CUSD 180 million
- DUSD 4.5 million
Explanation
Unexpected loss capital = 99.9% quantile minus expected loss = 180 − 40 = USD 140 million. Using 180 alone treats the whole quantile as capital, which assumes expected loss is not provisioned. Adding the two (220) is a sign error. The quantile is also the 100th worst of 100,000 simulated years.
Did you get it right without looking?
One question tells you little. A timed set on Operational Risk shows your real accuracy, how long you take and where you lose marks.
More Operational Risk questions
- A firm is considering outsourcing its payment processing to a third-party vendor to reduce operational risk from internal system failures. W…
- Why did the Basel Committee withdraw the advanced measurement approach (AMA) in the revised operational risk framework?
- A bank's risk and control self-assessment (RCSA) process rates a process's inherent risk as high and its control effectiveness as strong, gi…
- In an RCSA, a process has an inherent risk score of 20 (likelihood 4 x impact 5). Management rates the controls as reducing the risk by 60% …
- A firm uses scenario analysis to estimate a severe cyber-attack loss. Experts estimate a 1-in-20-year event costing USD 80 million and a 1-i…
- A bank sells complex structured notes to retail clients who were not suitable investors. Regulators fine the bank USD 40 million and the ban…