What does Operational Risk involve?

Operational risk primarily relates to the potential for losses resulting from inadequate or failed internal processes, people, systems, or external events. It encompasses a wide range of issues, including failures in internal controls, human errors, system failures, fraud, and other operational inefficiencies. Since the focus is on the internal workings of an organization, option B accurately captures the essence of operational risk, emphasizing that losses arise from mismanagement, lack of effective controls, or operational disruptions.

In contrast, the other options focus on different types of financial risk. Counterparty default risk pertains to the potential loss incurred when another party fails to meet their contractual obligations, which does not align with the definition of operational risk. Fluctuating interest rates refer specifically to market risk, which involves changes in the value of investments as interest rates rise or fall. Finally, insufficient liquidation options relate to liquidity risk, which involves the inability to buy or sell an asset without significantly affecting its price. All these aspects are important in their own right but fall outside the scope of operational risk.