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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A bank wants to use a complex deep learning model for pricing and hedging decisions in its trading book, but the model is difficult to interpret. Which approach best aligns with model risk management expectations?

The best approach is independent validation with documented limitations, explainability tools, benchmark models, ongoing monitoring and human override. Model risk standards apply fully to opaque AI models, and neither strong test results nor developer self-review replaces independent challenge.

  1. ASkip validation because the model outperformed in testing
  2. BValidate independently, document limitations, use explainability tools and benchmark models, and set ongoing monitoring with human overrideCorrect
  3. CUse the model only after removing all monitoring to avoid interference
  4. DApprove the model based on the developer's own review

Explanation

Opaque models still require independent validation, documentation, benchmarking, explainability techniques, monitoring and human override. Self-review lacks independence, and good test performance does not replace validation or monitoring.

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