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2018 April Paper Q1 v)

A

ace_ct8

Member
Can someone help me with this exam solutions please?

In the solution, it says
• It assumes that risks are fully independent

But is it possible that it also assume full dependence, because it assumes all top 5 risk will happen together over a given time period? what would the calculation be like if it was full dependence? would there have to be a correlation terms deducted from the sum of the top 5 risks?


The operational risk capital for each franchise is calculated as the sum of the risk

capital required for each of the top five operational risks for that franchise. An

additional 25% is added to the total to allow for the remaining operational risks.


(v) Discuss the advantages and disadvantages of this approach to calculating

operational risk capital.



 
HI - if there was full dependence (ie if one risk occurred, then all the other risks occurred) you would be adding a (large!) covariance term not deducting it?
 
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