Skip to content

FRM Part II · FRM Exam Part II · Case Study: Model Risk and Model Validation

A validation team reviews a bank's VaR model and finds that a spreadsheet macro used to aggregate position data silently drops positions whose identifiers contain special characters. Which statement best characterizes this finding?

It is an implementation and data integrity weakness. Positions silently dropped by the macro reduce measured exposure, so VaR is understated. The flaw lies in processing, not in the conceptual design or distributional choice of the model.

  1. AIt is a conceptual soundness weakness arising from the choice of distribution
  2. BIt is an implementation and data integrity weakness that can understate model outputsCorrect
  3. CIt is a purely governance weakness unrelated to model outputs
  4. DIt is a backtesting weakness that arises only from too few observations

Explanation

Dropped positions are a processing and data flaw in how the model is implemented, and they reduce measured exposure, understating VaR. The distributional choice is untouched, and the issue affects outputs directly rather than only governance or backtest sample size.

Did you get it right without looking?

One question tells you little. A timed set on Case Study: Model Risk and Model Validation shows your real accuracy, how long you take and where you lose marks.

Practise Case Study: Model Risk and Model ValidationFree diagnostic mock

More Case Study: Model Risk and Model Validation questions