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FRM Part II · FRM Exam Part II · Risk Identification

A trader enters a trade at the wrong price because a pricing feed fails, and the error is not caught because the independent price verification team was understaffed after redundancies. In a cause-event-impact framework, how should the elements be classified?

Causes are the underlying weaknesses, here understaffed verification and the feed failure; the event is the pricing or execution error; the impact is the financial loss. The other options invert the chain by treating the consequence as a cause, which breaks the cause-event-impact logic.

  1. ACause: inadequate staffing and system failure; Event: execution/pricing error; Impact: financial lossCorrect
  2. BCause: financial loss; Event: system failure; Impact: inadequate staffing
  3. CCause: execution/pricing error; Event: financial loss; Impact: inadequate staffing
  4. DCause: financial loss; Event: inadequate staffing; Impact: pricing feed failure

Explanation

Causes are the underlying drivers (people and systems weaknesses), the event is the operational incident (pricing/execution error), and the impact is the consequence (loss). The other options reverse these links, treating the loss as a cause.

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