Once the frequency and severity distributions for loss events have been determined, which of the following is an accurate description of the process…

Once the frequency distribution has been determined (for example, using the binomial, Poisson or

the negative binomial distributions) and the severity distribution has also been determined (for

example, using the lognormal, gamma or other functions), the loss distribution can be produced by a

Monte Carlo simulation using successive drawings from each of these two distributions. It is

assumed that the severity and frequency are independent of each other. The resulting distribution

gives a distribution showing the losses for operational risk, from which there Op Risk VaR can be

determined

using

the

appropriate

percentile.

Therefore Choice 'b' is the correct answer.