Operational Risk

Consider either your own company or a fictitious global bank. Assume that top management would like to have a formula through which it would be able to assess the "remoteness" level of each division or entity within the company; such an entity could, for example, be a branch in a retail division of the bank or a trading desk on the investment side of the bank). Before doing this problem, you may want to go over one of the manuscripts in the reading material (the Xu-Pinedo-Xue document) which has a section on the issue of remoteness.

1. Describe the structure of the formula you would like to propose for management and identify all the possible variables and parameters (parameters may, for example, be the weights with which you would multiply a variable) which may play a role in such a formula.

2. Describe how each variable would be measured (some variables may be discrete (i.e., High, Medium, Low or 0-1); some variables may assume any real value within a certain range).