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As the newly appointed head of operational risk for a large international bank,

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As the newly appointed head of operational risk for a large international bank, you must evaluate the company's current approach to estimating the firm-wide operational loss distribution. The bank's current approach is a bottoms-up process in which for each trading desk the operational loss severity distribution is estimated by fitting historical loss magnitude data to a Weibull distribution and the operational loss frequency distribution is estimated by fitting historical loss timing data to a Poisson distribution. Each trading desk's operational loss distribution is then estimated by aggregating the frequency and severity distributions using convolution. Finally, the firm-wide operational loss distribution is estimated using a copula function generated through Monte Carlo simulation. In evaluating this process, which of the following assumptions implied by the current approach will require further investigation?

I. The independence of operational loss events of each particular trading desk.

II. The independence of the frequency of operational loss events and the severity of operational loss events of each particular trading desk.

III. The independence of operational loss events between trading desks.

IV. The reliability and sufficiency of historical loss data for each trading desk.

A. I, II, III and IV

B. I, II and IV

C. II, III and IV

D. I and III
asked Sep 15, 2017 by tumpa

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