CISI Risk - Chapter 8

Question 1

Three limiting assumptions regarding models?

Answer 1

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

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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

Question 4

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

Answer 4

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

Question 5

What is the risk with confidence levels used in VAR?

Answer 5

It does not account for whats outside of the confidence level

Question 6

Why is stress testing important to VAR?

Answer 6

Understanding extreme outcomes in which the confidence level does NOT capture

Question 7

The shorter the time lag in the model the what?

Answer 7

Easier to gauge the models accuracy

Question 8

Main limitation of modelling with AI

Answer 8

They can be biased, leading to inaccurate decisions & predictions

Question 9

2 other limitations of modelling with AI?

Answer 9

Complex and difficult to interpret
Expensive to develop

Question 10

What is Operational Risk Scenario Modelling

Answer 10

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

Question 11

What team members are risk workshops usually held with>

Answer 11

Senior risk and business personnel.

Question 12

What two metrics are used to calculate Credit Risk VAR

Answer 12

Standard Deviation and Credit Migration Probabilities

Question 12

What three things does the Workshop capture?

Answer 12

The frequency
The typical loss
The severity of the loss

Question 13

How are Operational Risk Loss Events distributed

Answer 13

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

Question 14

What is Market VAR?

Answer 14

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

Question 15

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

Answer 15

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

Question 16

Who performs model risk governance?

Answer 16

Board of directors and Senior Management

Question 17

Who is ultimately responsible for the Model Risk Framework

Answer 17

Board of directors

Question 18

Who generally does the Model Risk Framework get delegated to?

Answer 18

Senior Members

Question 19

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

Answer 19

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

Question 20

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

Answer 20

Internal audit

Question 21

5 aspects to Model Risk Management

Answer 21

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.

Question 22

What is model risk

Answer 22

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