Banking · Risk Management & Model Risk
Model risk has grown in importance as financial institutions increasingly use internal models for pricing, capital estimation, and forecasting. Model risk refers to the possibility that:
- 1qualitative judgment must be prohibited in risk management
- 2decisions may be adversely affected because models are incorrect, misused, or based on faulty assumptions✓
- 3all market risks can be captured precisely by any approved model
- 4the institution refuses to use any quantitative tools
Correct answer
decisions may be adversely affected because models are incorrect, misused, or based on faulty assumptions
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