CISI Risk - Chapter 8 Flashcards

1
Q

Three limiting assumptions regarding models?

A

The shape of any distribution used by the model
The relationship between the past and future
The state of the business environment at the point the model was deigned

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2
Q

Limiting assumptions - What does the shape of an underlying distribution mean?

A

If the model was designed for normal distribution, it will be unsuitable for normally distributed

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3
Q

Limiting assumptions - What does the relationship between past and future mean?

A

Many models assume that the future will be similar to the past

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4
Q

Limiting assumptions - What does the state of business environment mean?

A

The environment will have changed since the model was developed, depreciating their useful ness and accuracy overtime

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5
Q

What is the risk with confidence levels used in VAR?

A

It does not account for whats outside of the confidence level

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6
Q

Why is stress testing important to VAR?

A

Understanding extreme outcomes in which the confidence level does NOT capture

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7
Q

The shorter the time lag in the model the what?

A

Easier to gauge the models accuracy

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8
Q

Main limitation of modelling with AI

A

They can be biased, leading to inaccurate decisions & predictions

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9
Q

2 other limitations of modelling with AI?

A

Complex and difficult to interpret
Expensive to develop

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10
Q

What is Operational Risk Scenario Modelling

A

Calculation of sufficient capital to guard against unexpected operational risk losses.

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11
Q

What team members are risk workshops usually held with>

A

Senior risk and business personnel.

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12
Q

What two metrics are used to calculate Credit Risk VAR

A

Standard Deviation and Credit Migration Probabilities

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12
Q

What three things does the Workshop capture?

A

The frequency
The typical loss
The severity of the loss

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13
Q

How are Operational Risk Loss Events distributed

A

Not normally, they have fat tails and often simulated with Lognormal distribution

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14
Q

What is Market VAR?

A

Max loss a firm can make with a specific confidence over a specific time period

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15
Q

What are the two elements of a sound model risk governance framework?
.

A

Roles and Responsibilities of staff members
Use of polices and procedures and the importance of model inventory and good documentation

16
Q

Who performs model risk governance?

A

Board of directors and Senior Management

17
Q

Who is ultimately responsible for the Model Risk Framework

A

Board of directors

18
Q

Who generally does the Model Risk Framework get delegated to?

A

Senior Members

19
Q

What are the 5 duties of a senior manager in the Model Risk Framework?

A

Establishing polices & procedures
Assigning staff
Oversight
Establishing model risk controls
Recognizing the need for change

20
Q

What function should asses the overall effectiveness of the model risk management framework?

A

Internal audit

21
Q

5 aspects to Model Risk Management

A

model risk definition
assessment of model risk
acceptable practices for model development, implementation and use
appropriate model validation activities, and
governance and controls over the model risk management process.

22
Q

What is model risk

A

model risk is the risk of loss resulting from using insufficiently accurate models to make decisions