Free GARP FRM Part II Operational Risk and Resilience Practice Questions
Practice 194 free Operational Risk and Resilience questions for GARP FRM Part II.
Sample Questions
Question 1
Easy
Risk-Adjusted Return on Capital (RAROC) is most commonly defined as:
Solution
A is correct. RAROC measures risk-adjusted profitability per unit of economic capital. The numerator is the economic return: revenues net of operating expenses and expected losses (and may include funding transfer pricing or tax adjustments). The denominator is economic capital, which is sized to cover unexpected loss at a high confidence level (for example, 99.9% over one year). Comparing RAROC against a firm-wide hurdle rate (cost of equity) tells management whether a business line is creating or destroying shareholder value on a risk-adjusted basis.
Question 2
Medium
Bank Alpha reports a Business Indicator (BI) of €8 billion. Compute the Business Indicator Component (BIC) under the Basel III Standardised Approach for operational risk.
Solution
C is correct. BI of €8bn falls inside Buckets 1 and 2. Apply the marginal coefficients to each slice: Bucket 1 contribution = €1bn × 12% = €0.12bn. Bucket 2 contribution = (€8bn − €1bn) × 15% = €7bn × 15% = €1.05bn. BIC = €0.12bn + €1.05bn = €1.17bn.
Question 3
Hard
Under the December 2017 Basel III reforms, Bank Theta uses internal models for credit risk. Once the output floor is fully phased in at 72.5%, the bank reports standardized-approach RWA of €120 billion and internal-models-based RWA of €60 billion. What total RWA must Bank Theta use for capital ratio purposes?
Solution
B is correct. The Basel III output floor caps the benefit a bank can derive from internal models relative to the standardized approach. The reported RWA must equal the greater of the internal-models RWA and 72.5% of the standardized-approach RWA: Because the floored standardized figure (€87B) exceeds the internal-models figure (€60B), the floor binds and Bank Theta must report €87 billion.