Which of the following risks and reasons justify the use of scenario analysis in operational risk modeling:

Which of the following risks and reasons justify the use of scenario analysis in operational risk modeling:

I. Risks for which no internal loss data is available

II. Risks that are foreseeable but have no precedent, internally or externally

III. Risks for which objective assessments can be made by experts

IV. Risks that are known to exist, but for which no reliable external or internal losses can be analyzed

V. Reducing the complexity of having to fit statistical models to internal and external loss data

VI. Managing the capital estimation process as to produce estimates in line with management’s desired capital buffers.
A . I, II and III
B . I, II, III and IV
C . V
D . All of the above

View Answer

Answer: B

Explanation:

All the reasons and risks presented above are valid reasons for using scenario analysis, except V and VI – ie, the need to reduce the complexity of calculations is not a valid reason for using scenario analysis. Similarly, making operational risk capital estimates match management’s desired capital allocation targets is also not a valid reason. Capital calculations are intended to provide adequate capital for managing the risk from operations, regardless of what management may desire them to be.