FRM Operational Risk Flashcards
6 cards from real FRM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 FRM Operational Risk flashcards as text
What is the primary goal of segregation of duties as an internal control?
Answer: To prevent any single employee from having the ability to both initiate and authorize the same transaction
Segregation of duties reduces fraud and error risk by requiring different people to handle authorization, custody, and recordkeeping for the same process.
In a Loss Distribution Approach (LDA) for operational risk capital, what two distributions are typically modeled separately?
Answer: Frequency of loss events and severity of individual losses
LDA models the frequency (how often losses occur) and severity (how large each loss is) distributions separately, then combines them to produce an aggregate annual loss distribution.
What does 'tail risk' mean specifically in the context of operational risk?
Answer: The risk of extremely large, low-probability losses that occur in the tail of the loss distribution
Operational risk tail events—such as massive rogue trading losses or major cyber incidents—are rare but can cause losses far exceeding typical operational loss experience.
Which of the following is a characteristic of operational risk that distinguishes it from market and credit risk?
Answer: Operational risk losses often result from human behavior and process failures that are difficult to model statistically
Unlike market or credit risk, operational risk stems from internal processes, people, and systems, making it harder to model with standard statistical techniques and harder to hedge.
What is 'reputational risk' and how does it relate to operational risk?
Answer: Reputational risk is the potential loss in business value from negative public perception, often triggered by operational failures
Reputational risk is not directly included in the Basel operational risk capital definition but is frequently caused by operational failures such as fraud, system outages, or compliance breaches.
What is the purpose of an insurance program in operational risk management?
Answer: To transfer the financial impact of certain operational losses to an insurer, reducing net losses and potentially capital requirements
Insurance can mitigate the financial impact of specific operational risks such as fraud, property damage, and errors, and under AMA was allowed to reduce capital charges up to 20%.