Financial Risk Manager Part 1

The new VaR model developed by the CIO traders at JPMorgan Chase & Co. was eventually revoked and the prior one reinstated. This decision was made after the bank's Model Risk and Development Office identified several mathematical and operational flaws in the new model. These flaws included:

• Coding errors in the calculation of hazard rates and correlation estimates
• Use of unrealistically low volatility for illiquid securities
• Use of a Uniform Rate option instead of the Gaussian Copula model required under Basel 2.5

The new model had resulted in risk numbers that were 50% lower than the previous numbers, which encouraged more speculative trading and high-risk strategies. The revocation of the new model and reinstatement of the old one was a significant step taken by the bank to address these issues and mitigate the risks associated with the flawed model.

Why other options are incorrect:

• A: The new model was not developed in collaboration with the Comptroller of Currency - it was developed internally within JPMorgan
• B: The new model actually resulted in risk numbers that were 50% LOWER, not higher
• C: The new model did not correct mathematical flaws but instead introduced new flaws that understated risks