Risk Management Flashcards
(15 cards)
What is the definition of a model according to the Federal Reserve and OCC?
A model is a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates.
Key components include inputs, processing, and outputs.
What are the key components of a model?
- Inputs: Source data, assumptions, and transformations
- Processing: Model formulas, algorithms, or calculations
- Outputs: Reports, estimates, or forecasts used for decision-making.
Regulatory expectations include validation, proper documentation, and governance structures to ensure reliability and accuracy.
What are the stages of the model lifecycle?
- Development
- Implementation
- Validation & Testing
- Monitoring & Maintenance
- Retirement
Each stage has specific activities aimed at ensuring model effectiveness and reliability.
What is the purpose of the validation and testing stage in the model lifecycle?
To conduct an independent review to identify weaknesses, validate accuracy, and ensure robustness.
This is crucial for maintaining the integrity of the model.
Define granularity in the context of modeling.
Granularity refers to the level of detail in a model; higher granularity provides more precision but increases complexity and risk of error.
It is important to balance granularity with flexibility based on the model’s purpose.
What does flexibility mean in modeling?
Flexibility is the ability to adapt the model for different uses; more flexibility increases usability but may reduce accuracy for specific cases.
Finding the right trade-off is essential.
What are some best practices for documenting assumptions in modeling?
- Clearly document and justify all assumptions
- Use transparent sign conventions (e.g., revenues positive, costs negative)
- Differentiate between hardcoded assumptions and derived values.
- use another sheet or workbook for assumptions
This ensures clarity and accountability in the modeling process.
What is the purpose of roll-forward schedules in modeling?
To connect forecasts to previous periods, helping to minimize linking errors and maintain consistency.
This practice enhances the reliability of financial projections.
What should a cover page of a model include?
- Company/project name
- Model description
- Contact details
This helps establish clarity on model purpose and ownership.
What is a recommended practice regarding linking workbooks?
Minimize external links to other files to reduce dependency issues; if linking is necessary, document all references and maintain backup copies.
This helps ensure model integrity and ease of use.
What are color coding conventions for different cell types in a model?
- Inputs: Blue
- Calculations: Black
- Links to other sheets: Green
- Outputs: Bold or highlighted
Consistent formatting enhances readability and reduces errors.
What is the purpose of error handling in modeling?
To implement error-check formulas (e.g., balance checks, missing data alerts) and use functions like IFERROR and ISBLANK to trap potential issues.
This ensures the reliability of the model outputs.
What should be included in a version control log?
A version log should document changes, authors, and dates.
Using file naming conventions (e.g., ‘Model_v1.2.xlsx’) is also recommended.
Fill in the blank: To enhance professional presentation, ensure key reports fit within standard print _______.
[margins].
Including headers and footers is also important.
What are some use cases for VBA in financial modeling?
- Automating repetitive calculations
- Creating print macros for standardized formatting
- Error trapping and validation
- Enhancing user interactivity with dropdowns
- Consolidating data from multiple sheets or workbooks efficiently
These applications improve efficiency and usability of models.
