FRM Part I · FRM Exam Part I · Operational Risk
A firm lost significant money when a model used for pricing was implemented with a spreadsheet formula error that went unreviewed. Which mitigation most directly addresses this type of operational risk?
Independent model validation with change controls over spreadsheets is the best mitigation. The loss came from an unreviewed implementation error, which is a model and process risk. Credit protection, more counterparties or a higher VaR confidence level do not prevent or detect formula mistakes.
- AIndependent model validation and change controls over end-user spreadsheetsCorrect
- BBuying additional credit default protection
- CIncreasing the number of trading counterparties
- DRaising the confidence level used for market VaR
Explanation
The loss arose from model and process error, so independent validation, review and version/change control target the cause. Credit protection, counterparty diversification and VaR confidence level address other risks and would not catch a formula error.
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