FRM FRM Operational Risk 1

Question 1

How does Basel II define operational risk?

Accepted Answer

The risk of loss resulting from inadequate or failed internal processes, people, systems, or external events

Answer

Basel II defines operational risk narrowly to exclude market and credit risk, focusing on failures in people, processes, systems, and external events such as natural disasters.

Question 2

Which of the following is an example of an internal fraud operational risk event?

Accepted Answer

A rogue trader concealing losses through unauthorized transactions

Answer

Internal fraud involves intentional acts by employees such as unauthorized trading, embezzlement, or falsifying records to conceal losses.

Question 3

Under the Basel II Basic Indicator Approach (BIA) for operational risk capital, the capital charge equals:

Accepted Answer

15% of the average positive annual gross income over the past three years

Answer

The BIA applies a fixed alpha factor of 15% to average gross income as a simple proxy for operational risk exposure without differentiating by business line.

Question 4

What is the key advantage of the Advanced Measurement Approach (AMA) for operational risk capital over the Basic Indicator Approach?

Accepted Answer

It allows banks to use internal loss data and models to calculate capital, potentially reducing the capital requirement

Answer

AMA permits sophisticated banks to build internal models incorporating loss history, scenarios, and risk factors, which can generate lower and more risk-sensitive capital requirements.

Question 5

What does 'Key Risk Indicator' (KRI) measure in an operational risk framework?

Accepted Answer

A metric that signals changes in the level of operational risk exposure before losses materialize

Answer

KRIs are forward-looking metrics—such as system downtime, staff turnover, or failed trades—that provide early warning of increasing operational risk.

FRM Practice Test

FRM Practice Test

FRM FRM Operational Risk 1