FRM Part I · FRM Exam Part I · Operational Risk
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-in-50-year event costing USD 200 million. Assuming the severity in each scenario is independent and the events are the only sources of loss with annual frequencies equal to 1/return period, what is the expected annual loss from these two scenarios?
The expected annual loss is USD 8 million. Multiply each severity by its annual frequency: 80 million times 1/20 equals 4 million, and 200 million times 1/50 equals 4 million. Adding the two gives 8 million per year.
- AUSD 4.0 million
- BUSD 8.0 millionCorrect
- CUSD 280.0 million
- DUSD 6.0 million
Explanation
Expected annual loss = 80 x (1/20) + 200 x (1/50) = 4 + 4 = USD 8 million. Using only one scenario gives 4. Summing the severities gives 280 without frequency weighting. A value of 6 would come from averaging the two 4 values wrongly with other weights.
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