Question
Your firm's risk department does a detailed analysis of errors in processing transactions and the severity of losses for those errors. Using a Monte Carlo
Your firm's risk department does a detailed analysis of errors in processing transactions and the severity of losses for those errors. Using a Monte Carlo study, it develops the table shown below to illustrate cumulative probabilities of losses for one year. Interpolate to find the Operational Worst Loss at 0.95, 0.99, and 0.999 confidence levels. Then, also using the Expected Operational Loss find Unexpected Loss or Operational VaR at each confidence level. Losses Cumulative Probabilities
$ 250,000 .9000
$ 500,000 .9200
$ 750,000 .9700
$ 1,000,000 .9850
$ 1,250,000 .9970
$3,000,000 .9995
Expected Loss: $ 75,000
0.95 WL
Unexpected Loss
0.99 WL
Unexpected Loss $1,104,167 75,000 = $1,029,167
0.999 WL
Unexpected Loss
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