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FRM Part II · FRM Exam Part II · Risk Governance

A bank's operational risk appetite statement sets a tolerance of annual operational losses not exceeding 0.50% of gross income. Gross income is USD 800 million. Year-to-date losses are USD 3.1 million at the end of month 9, and management expects the same monthly loss rate for the remainder of the year. Which conclusion is correct?

The tolerance equals 0.5% of USD 800 million, or USD 4.0 million. Annualizing USD 3.1 million over nine months gives about USD 4.13 million, which exceeds the tolerance. Management should therefore escalate and consider action rather than treat the position as within appetite.

  1. AProjected full-year losses are USD 4.13 million, within the USD 4.0 million tolerance
  2. BProjected full-year losses are USD 4.13 million, breaching the USD 4.0 million toleranceCorrect
  3. CProjected full-year losses are USD 3.1 million, within tolerance
  4. DProjected full-year losses are USD 4.65 million, breaching tolerance

Explanation

The tolerance is 0.5% x 800 = USD 4.0 million. The monthly rate is 3.1/9 = 0.3444, so the annual projection is 0.3444 x 12 = USD 4.13 million, which exceeds 4.0. Using 3.1 alone ignores the remaining months; 4.65 wrongly scales by 1.5.

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