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FRM Part II · FRM Exam Part II · Validating Bank Holding Companies' Value-at-Risk Models for Market Risk

A bank's model validation team is asked to confirm that the firm's internal VaR model is fit for its regulatory and management purposes. Which description best captures the core objective of VaR model validation?

The core objective is to assess whether the VaR model's design, implementation and ongoing performance are sound and yield risk estimates suitable for their intended use. Validation is not about minimizing capital, abandoning VaR for stress tests, or measuring desk profits.

  1. AAssessing whether the model's design, implementation and ongoing performance are sound and produce risk estimates appropriate for their intended useCorrect
  2. BEnsuring the VaR model always produces the lowest capital charge permitted by regulation
  3. CReplacing the VaR model with a stress-testing framework once exceptions occur
  4. DConfirming that the trading desks have met their profit targets over the year

Explanation

Validation is a broad process that evaluates conceptual soundness, correct implementation and outcomes of the model relative to its intended use. It is not aimed at minimizing capital, replacing VaR with stress tests, or assessing profitability.

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