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

Which validation activity should be performed by a party independent of the model developers under sound model risk governance?

Effective challenge, covering conceptual soundness assessment and review of monitoring and outcomes, should be done independently of developers. Developers select parameters and write code, so their doing validation would undermine objectivity.

  1. ASelecting the model's final parameters
  2. BWriting the model code
  3. CEffective challenge, including assessing conceptual soundness and ongoing monitoring resultsCorrect
  4. DSetting the business use of the model

Explanation

Supervisory guidance requires validation with independence from development, providing effective challenge via conceptual soundness review, outcomes analysis and ongoing monitoring. Parameter selection and coding belong to development, and use is a business decision.

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