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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A trader in a bank's first line of defense discovers that a model used to value a position understates risk. According to the three lines of defense model, what is the most appropriate expectation of the trader?

The trader should escalate the concern and manage the risk, because the first line of defense owns the risks it takes and is accountable for identifying issues. Independent risk and internal audit provide oversight and assurance, but they do not relieve the business of its own responsibility.

  1. ASay nothing, because model validation is solely the second line's responsibility
  2. BEscalate the concern and manage the risk, since the first line owns the risks it takesCorrect
  3. CWait for internal audit to identify the problem in its next review
  4. DAdjust the model silently so the risk numbers reconcile

Explanation

The first line owns and is accountable for the risks it takes, including identifying and escalating issues. Other lines add oversight but do not remove first-line responsibility. Silent adjustment bypasses model governance and is improper.

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