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

Which of the following is the best example of a control that mitigates model risk through limiting how a validated model is used?

Restricting the model to approved products and parameter ranges, with sign-off and monitoring for exceptions, is the best use-limiting control. It prevents the model being applied outside its validated scope, whereas the other choices increase overfitting, remove independence or destroy the audit trail.

  1. AUsing the model only within approved product types and parameter ranges, with exceptions needing sign-off and monitoringCorrect
  2. BIncreasing the model's number of parameters to improve in-sample fit
  3. CHaving the developer perform the final validation to speed approval
  4. DDeleting prior model versions to avoid confusion

Explanation

Restricting use to the intended scope and ranges, with documented exceptions and monitoring, reduces risk of misuse. Adding parameters may overfit, developer-led validation lacks independence, and deleting versions undermines audit trail and version control.

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