CORES Scenario Analysis & Stress Testing 3

Question 1

A systemic cyber-attack simultaneously disables payment processing at three large financial institutions. This type of scenario is BEST classified as:

Accepted Answer

Systemic correlated stress scenario

Answer

Simultaneous impact on multiple institutions from a common threat represents a systemic, correlated stress scenario rather than a firm-specific event.

Question 2

Under the Basel III framework, what role does the Loss Distribution Approach (LDA) play in relation to scenario analysis?

Accepted Answer

Scenario analysis supplements LDA by capturing low-frequency, high-severity tail events

Answer

LDA relies on historical loss data and may underestimate rare catastrophic events, so scenario analysis fills this gap for the tail of the distribution.

Question 3

A firm conducts a geopolitical stress test assuming a major trade war. Which operational risk sub-category is MOST directly activated?

Accepted Answer

Business disruption and system failures through supply chain impacts

Answer

Trade wars typically disrupt supply chains and third-party services, most directly triggering business disruption and system failure operational risk categories.

Question 4

Which statistical technique is MOST commonly used to model the aggregate loss distribution when combining frequency and severity in a stress scenario?

Accepted Answer

Monte Carlo simulation

Answer

Monte Carlo simulation generates thousands of combined frequency and severity draws to estimate the full aggregate loss distribution under stress.

Question 5

A risk manager notices that scenario assumptions created two years ago no longer reflect the firm's current risk profile. What action should be taken FIRST?

Accepted Answer

Conduct a formal scenario refresh process reviewing assumptions against current business and environment

Answer

A structured scenario refresh that reassesses assumptions against current conditions is the appropriate first step before any capital or reporting conclusions are drawn.

(CORES) Certified Operational Risk Executive Specialist Practice Test

(CORES) Certified Operational Risk Executive Specialist Practice Test

CORES Scenario Analysis & Stress Testing 3