FRM Part II · FRM Exam Part II · Risk Identification
A bank's process map of its wire transfer process shows 6 manual handoffs between teams. Historical review indicates that each manual handoff has an independent 2% chance of introducing an error, and errors are not corrected downstream. The bank plans to automate 3 of the handoffs, which then carry no error probability. By approximately how many percentage points does the probability of at least one error in the process fall?
The probability of at least one error falls by roughly 5.5 points, from about 11.4% to about 5.9%, which is closest to 5.7 points. It uses 1 minus 0.98 raised to the number of manual handoffs; the simple 6-point linear approach ignores compounding.
- AAbout 5.7 pointsCorrect
- BAbout 6.0 points
- CAbout 3.0 points
- DAbout 11.4 points
Explanation
Before: 1 - 0.98^6 = 1 - 0.8858 = 11.42%. After: 1 - 0.98^3 = 1 - 0.9412 = 5.88%. The fall is 5.54 points, closest to... recomputing precisely: 0.98^3 = 0.941192, so 5.88%; 0.98^6 = 0.885842, so 11.42%; difference 5.54, which rounds to about 5.5, nearest option is 5.7. The 6.0 option uses a linear 3 x 2% reduction, which ignores compounding; 3.0 halves a single 6%; 11.4 is the original risk only.
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