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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

An asset manager reviews four events: (1) a trader enters an order with the wrong quantity; (2) a bond issuer misses a coupon payment; (3) a fund cannot sell a large position without a steep price concession; (4) equity prices fall market-wide. Which option correctly classifies the events in order as operational, credit, liquidity and market risk?

The correct mapping is event 1 operational, event 2 credit, event 3 liquidity and event 4 market risk. Order-entry error is human failure, a missed coupon is counterparty default, a costly forced sale is illiquidity, and a market-wide price fall is market risk.

  1. A(1), (2), (3), (4)Correct
  2. B(2), (1), (4), (3)
  3. C(1), (3), (2), (4)
  4. D(4), (2), (3), (1)

Explanation

A wrong order entry is a human error, hence operational risk. A missed coupon is issuer default, hence credit risk. Inability to sell without price concession is market liquidity risk. A market-wide equity decline is market risk. The other mappings swap categories.

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