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7、As a result of the Basel standards every bank must now, calculate explicit capital charges to cover operational risk by one of three approaches: the basic indicator approach (BIA), the standardized approach (SA), and the advanced measurement approach (AMA). Which of the following statements are TRUE with respect to the operational risk approaches?

In practice the AMA approach is the most flexible approach for operational risk.
The most popular method to satisfy the AMA standards is the loss distribution approach (LDA).
The AMA method allows a bank to build its own operational risk model and measurement system, comparable to market risk standards.
BIA is widely used in insurance and actuarial science.
A) I, II, and III only.
 
B) I, II, and IV only.
 
C) II and IV only.
 
D) None of these.

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5、In the LDA process, the severity process describes:

A) the term of the operational loss.
 
B) the distribution of the operational loss.
 
C) the size of the operational loss.
 
D) the number of losses that occur.

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3、The most popular method to be in compliance and satisfy the AMA standards is:

A) Value at Risk.
 
B) loss distribution approach.
 
C) basic risk estimation.
 
D) total risk method.

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The correct answer is B

Loss Distribution Approach (LDA) is the most popular method.

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4、In practice the most versatile approach for operational risk quantification is:

A) basic indicator approach.
 
B) standardized approach.
 
C) advanced measurement approach.
 
D) limited distribution approach.
 

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The correct answer is C

Advanced measurement approach offers the greatest flexibility.

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2、Which of the following statements is (are) TRUE regarding the loss distribution approach (LDA)?

It is the most popular way to satisfy the AMA standards.
It is commonly used by endowments and foundations.
It requires an estimate of the probability distribution function.
It cannot be used if the frequency process is Poisson.
A) II and IV only.
 
B) I only.
 
C) I and III only.
 
D) None of these.

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The correct answer is B

Statement I is correct. LDA is the most common way to satisfy AMA standards.

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The correct answer is A

For high confidence intervals it suggests that operational risk is dependent upon only the tail of the severity distribution. Frequency is only input as an expectation, it is not essential to calibrate a particular counting process.