FRM Part II · FRM Exam Part II · Risk Identification
During a scenario workshop, a bank's experts estimate that a payment-system outage will occur once every 20 years and, when it occurs, cause a loss with a mean of USD 40 million. Experts then note that a mitigation project will cut the frequency to once every 50 years without changing severity. What is the reduction in expected annual loss from the project?
The expected annual loss falls by USD 1.2 million. Before the project it is USD 40 million times 1/20, or USD 2.0 million; afterward it is USD 40 million times 1/50, or USD 0.8 million. The difference is the benefit of the mitigation.
- AUSD 1.2 millionCorrect
- BUSD 0.8 million
- CUSD 2.0 million
- DUSD 1.6 million
Explanation
Before: 40 x (1/20) = USD 2.0 million. After: 40 x (1/50) = USD 0.8 million. Reduction = 2.0 - 0.8 = USD 1.2 million. USD 0.8 million is only the post-project expected loss, and USD 2.0 million is the pre-project figure.
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