The PRMIA ORM Certificate - 2023 Update (8020) exam is a good choice for Risk Managers and Consultants and if the candidate manages to pass PRMIA ORM Certificate - 2023 Update exam, he/she will earn PRMIA ORM Certification. Below are some essential facts for PRMIA 8020 exam candidates:
The Internal Loss Multiplier (ILM) is part of the Basel III Standardized Approach. Which of these definitions best descibes it?
Correct : C
The Internal Loss Multiplier (ILM) is a key component of the Basel III Standardized Approach for Operational Risk. It is designed to adjust capital requirements based on a bank's historical loss experience.
Definition of ILM
ILM is a scaling factor that adjusts the operational risk capital requirement based on a bank's internal loss history.
It is derived using a formula that incorporates historical operational risk losses relative to a bank's revenue.
Why ILM Exists in Basel III
Basel III replaced the Advanced Measurement Approach (AMA) with a Standardized Approach that includes ILM to ensure that banks with high historical losses hold more capital for operational risk.
Why Other Answers Are Incorrect
Option
Explanation
A . It is a financial-statement-based proxy for operational risk.
Incorrect -- ILM is not a general financial statement proxy; it specifically adjusts capital based on past operational losses.
B . It is a non-financial factor that is based on a bank's average historical losses.
Incorrect -- ILM is financial in nature because it directly influences capital requirements.
D . It is uniform, and is used for indicating consistent incidents on an average return basis.
Incorrect -- ILM is not uniform; it is bank-specific and varies based on loss history.
PRMIA Reference for Verification
PRMIA Operational Risk Standards
Basel III Standardized Approach for Operational Risk
For the National Australia Bank - FX Options case study, large and unusual transaction activity was a concern for what reason?
Correct : C
The National Australia Bank (NAB) FX Options Case Study is a well-known example of operational risk, fraud, and governance failure.
What Happened?
Traders engaged in unauthorized foreign exchange (FX) options trading, using deep-in-the-money options and other complex instruments.
They manipulated profits and losses to smooth earnings and mislead risk managers and auditors.
Why Answer C is Correct
The traders smoothed both profits and losses to avoid detection and ensure continued trading bonuses.
This aligns with PRMIA's Operational Risk Management Guidelines, which highlight that hidden trading losses and smoothing techniques increase financial crime risk.
Why Other Answers Are Incorrect
Option
Explanation
A . Complex structured transactions aided in the smoothing of losses.
Incorrect -- Smoothing occurred with both profits and losses, not just losses.
B . Deep-in-the-money options and other complex structured transactions aided in the smoothing of losses.
Incorrect -- Profits were also manipulated, making this answer incomplete.
D . Deep-in-the-money options aided in the smoothing of losses.
Incorrect -- This focuses only on deep-in-the-money options and ignores other structured transactions involved in the fraud.
PRMIA Reference for Verification
PRMIA Fraud and Risk Management Case Studies
Basel Principles on Market Risk and Internal Control Failures
