Term
| Contrast and compare top-down and bottom-up approaches to measuring OR: |
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Definition
Top down is simple and not data intensive - it does not differentiate between HFLS and LFHS events. It cannot account for the implementation of new OR risk controls or diagnose specific areas of operational weakness.
Bottom-up analyses risks in individual processes. Distinguishes between HFLS and LFHS. Effects of new risk controls can be modelled. Forward looking whereas top down is backward looking. More complex and data intensive than top down. |
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Term
| What are the 6 common types of top-down OR models: |
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Definition
- Multifactor models
- Income-based models
- Expense based models
- Operating leverage models
- Scenario analysis
- Risk profiling models |
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Term
| What are the 3 broad categories of bottom-up models: |
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Definition
Process approaches (causal networks or scorecards, connectivity models, reliability models.
Acturial approaches (empirical loss distribution which uses historical experience to create a simple probabiilty distribution of operational risk costs), parametric loss distribution which uses poisson distribution, Extreme value theory
Proprietary OR models |
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Term
| What are the ways of hedging against OR losses: |
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Definition
- Insurance
- Self insurance
Cash reserves
reserves of liquid assets
contingent credit line
off-shore insurance subsidiary
risk prevention and control
- Derivatives
catasrophe options
catorrophe bonds |
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Term
| What are the main limits to OR hedging? |
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Definition
- Identifying potential risks
- subjectivity
- unanticipated correlations
- data availability / reliability
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