easy · FRM Part 2 Operational Risk
In the context of Model Risk Management, what is 'effective challenge'?
- A mandatory internal code-review session performed solely by the original model developer themselves.
- A formal debate between two competing desk traders about which model produces the highest daily trading profit.
- The process of a banking regulator issuing a formal fine or public sanction after a serious model failure has occurred.
- Critically evaluating a model's logic and testing its limitations by a party not involved in its development.
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