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FRM Part II · FRM Exam Part II · Risk Identification

In an RCSA workshop, a trade settlement team rates the inherent risk of a failed-settlement event as High and describes a daily reconciliation control it considers Effective. The risk team wants to determine the residual risk. Which statement best describes residual risk in this context?

Residual risk is the level of risk remaining after considering existing controls and how effective they are assessed to be. Inherent risk is the pre-control view. It is not historical loss or a post-remediation target level.

  1. AThe risk that remains after taking into account the existing controls and their assessed effectivenessCorrect
  2. BThe risk that would exist if no controls were in place
  3. CThe total expected loss recorded in the loss database over the past year
  4. DThe risk that remains after all possible additional mitigation actions have been implemented

Explanation

Residual risk is inherent risk adjusted for the mitigating effect of current controls as assessed. Inherent risk is the no-control view. Loss data is a different input, and risk after future actions is a target risk, not current residual risk.

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