Scribd
Upload
5 views

Assignments and Practice Questions 2020

Uploaded by

Online Trading Tips & Breaking News
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
5 views

Assignments and Practice Questions 2020

Uploaded by

Online Trading Tips & Breaking News
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

FACULTY OF COMMERCE

DEPARTMENT OF INSURANCE AND ACTUARIAL SCIENCE


MSC IN RISK MANAGEMENT AND INSURANCE (MRI)

OPERATIONAL RISK MANAGEMENT – [CIN 5203]


Assignments and Practice Questions
Lecturer - Mr R. Mhasho
[email protected]
0772131342
ASSIGNMENTS
Individual assignment
Answer all questions showing all the calculations.

QUESTION 1
Frequency Distribution Severity Distribution
Probabilit
y Frequency Probability Severity
0.6 0 0.5 US$1,000
0.3 1 0.3 US$10,000
0.1 2 0.2 US$100,000
Expectation a Expectation b

Fig. 1 above represents an Operational Risk Loss Frequency and Severity Distribution for a particular
insurance company.
a) Calculate the value of a [4]
b) Calculate the value of b [4]
c) Hence calculate the Operational Risk Expected Loss for this company [5]
d) If, from the Operational Risk loss distribution of this company it can be deduced that the
lowest number such that the probability is greater than 95% quantile is 1 000 000 with a
probability of 96.4%, find the operational VaR, i.e., unexpected loss. [5]
e) As the Operational Risk Manager, what action would you take in this case? [2]

QUESTION 2
Assume the following operational processes: A Bernouli distribution characterizes of the frequency
losses. The probability of no operational loss =95%: P (0) =95%, P (1) =5%.
The loss severity is characterized by a PMF: P (-$5, 000 loss) = 4%, P (-$30,000 loss) =20%,
P (-$10,000 loss) =24% and P (-$5,000) = 52%
a) What is the 99% operational value at risk (VaR)? [9]
b) What is the 95% operational value at risk (VaR)? [9]
c) What conclusion can you make out of the two results? [2]

QUESTION 3
1. Numerically illustrate the difference between the Basic Indicator and the Standardised
approaches for the determination of operational risk charge ORC under the Basel II
framework. Comment on which approach is most suited for the recently established National
Building Society Bank.
2. A bank uses the ‘internal measurement approach’ (IMA) operational loss quantification
methodology and is faced with the following people internal operational risk cases;
Case A: 30,000 transactions are processed in the back office and the expected probability of a human
error giving rise to an operational loss is 0.01. Each time a loss occurs the operational loss is
USD1000.
Case B: 60 Deals are made in Corporate Finance and the probability of internal fraud resulting in any
one of these making an operational loss of 0.0005. However, if such a loss is made, it will amount to
USD10000000
 Show that the expected loss is the same in the two cases [3]
 Calculate the operational risk charge (ORC) in both cases [5]
 Give a brief explanation for the ORC results [2]
NB: Assume gamma=3.100 for Case A and 3.998 for Case B

QUESTION

Critique the OR definitions from insurance, banking, power utility and Broker perspectives. [5]
What are the weaknesses of OR? [6]
Highlight the pitfalls of model risk in the history of ORM. [7]
What are the three major types of capital and outline the role of each in a financial institution. [7]

You might also like