2008 Frm Study Guide

7/29/2019 2008 Frm Study Guide

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2008FRM

Examination

StudyGuide

TopicOutline,Readings,TestWeightings

The

Study

Guide

sets

forth

primary

topics

and

subtopics

under

the

five

risk

related

disciplines

covered

in

the

FRM

exam.

The topicswere selected by the FRM Committee as topics that riskmanagerswhowork in practice today have to

master.ThetopicsarereviewedyearlytoensuretheFRMexamiskepttimelyandrelevant.

FRMExaminationApproach

TheFRMexamisapracticeorientedexamination.Itsquestionsarederivedfromacombinationoftheory,assetforthin

thereadings,andrealworldworkexperience.Candidatesareexpectedtounderstandriskmanagementconceptsand

approachesandhowtheywouldapplytoariskmanagersdaytodayactivities.

TheFRMexaminationisalsoacomprehensiveexamination,testingariskprofessionalonanumberofriskmanagement

conceptsandapproaches.Itisveryrarethatariskmanagerwillbefacedwithanissuethatcanimmediatelybeslotted

intoonecategory.Intherealworld,ariskmanagermustbeableto identifyanynumberofriskrelated issuesandbe

abletodealwiththemeffectively.

Readings

QuestionsfortheFRMexaminationarederivedfromthereadingslistedundereachtopicoutline. Thesereadingswere

selectedbytheFRMCommitteetoassistcandidates intheirreviewofthesubjectscoveredbytheexam.It isstrongly

suggestedthatcandidatesreviewthesereadingsindepthpriortosittingfortheexam.

TheFinancialRiskManagerHandbook,4thedition,byPhilippeJorion(NewYork:Wiley&Sons,2007),coversmostoftheFRMexaminationtopicsattheappropriate level.However,pleasenotethattheFRMHandbookwasdesignedtohelpcandidatesreviewthematerialand isnotatextbook.Alone,theFRMHandbook isnotsufficienttoprepareacandidatetopasstheexamination. AninteractiveCDwithquestionsandanswersfrompreviousFRMexams,andthe2008FRMCoreReadingsCoursePackarealsoavailabletoassistcandidateswiththeirexampreparation.

FRMCourse

Providers

Somecandidatesmaywant tomore formally review thematerialswithFRMCourseProviders.CourseProvidersare

listedon theGARPwebsite.GARPdoesnotendorseanyCourseProviderbutmerely lists themasa service toFRM

candidates.

FRMCommitteeMembers

NomemberoftheGARPFRMCommitteeispermittedtoreceiveroyaltiesonbooksheorshehaswrittenthatarepart

of thisStudyGuide.Anyroyaltiesmusteitherbepaid toGARP insupportoftheexaminationscostorbegiventoa

charity.

2008 Global Association of Risk Professionals, Inc.


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2008 FRM Study Guide

StudyOutline,TestWeightings,Readings

I. QuantitativeAnalysis10%

Probabilitydistributions

Mean,standarddeviation,correlation,skewness,andkurtosis

Estimatingparametersofdistributions

Hypothesis

testing

Linearregressionandcorrelation

Statisticalpropertiesandforecastingofcorrelation,covariance,andvolatility

MonteCarloanalysis

Extremevaluetheory;basicprinciples

QuantitativeAnalysisReadings:

1. LindaAllen,JacobBoudoukh,AnthonySaunders,UnderstandingMarket,CreditandOperationalRisk:TheValue

AtRiskApproach(Oxford:BlackwellPublishing,2004).

Chapter2QuantifyingVolatilityinVaRModels

2. DamodarNGujarati,EssentialsofEconometrics,3rd

Edition(NewYork:McGrawHill,2006).

Chapter1TheNatureandScopeofEconometrics

Chapter

2

Review

of

Statistics

I:

Probability

and

Probability

Distributions

Chapter3CharacteristicsofProbabilityDistributions

Chapter4SomeImportantProbabilityDistributions

Chapter5StatisticalInference:EstimationandHypothesisTesting

Chapter6BasicIdeasofLinearRegression:TheTwoVariableModel

Chapter7TheTwoVariableModel:HypothesisTesting

Chapter8MultipleRegression:EstimationandHypothesisTesting

3. PaulWilmott,PaulWilmottIntroducesQuantitativeFinance,2nd

Edition(NewYork:Wiley&Sons,2007).

Chapter22ValueatRisk

AppendixAAlltheMathYouNeedandNoMore(AnExecutiveSummary)

NOTE:Candidatesshouldnotmemorizeformulasofdistributionsbutshouldunderstandwhenitisappropriate

touseaparticulartypeofdistribution.

II. MarketRiskMeasurementandManagement30%

Interestratesandbondpricing

Interestrate,foreignexchange,equity,andcommodityrisks

Derivativesonfixedincomesecurities,interestrates,foreignexchange,equities,andcommodities

Valuationandriskanalysisoffutures,forwards,swaps,andoptions

Identifyingandmeasuringriskexposures

ValueatRisk:

1. Definition,deltanormal,historicalsimulation,MonteCarlo

2. Implementation

3. Limitationsandalternativeriskmeasures,e.g.,conditionalValueatRisk

Stresstesting

Emergingmarket

risks

including

currency

crises

Measuringandmanagingcorporateexposures,includingcashflowatriskandearningsatrisk

MarketRiskMeasurementandManagementReadings:

1. JohnHull,Options,Futures,andOtherDerivatives,6th

Edition(NewYork:PrenticeHall,2006).

Chapter3HedgingStrategiesusingFutures

Chapter5DeterminationofForwardandFuturesPrices

Chapter6InterestRateFutures

Chapter7Swaps



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Chapter9PropertiesofStockOptions

Chapter10TradingStrategiesInvolvingOptions

Chapter11BinomialTrees

Chapter13TheBlackScholesMertonModel

Chapter15TheGreekLetters

Chapter16VolatilitySmiles

Chapter22ExoticOptions

2. PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rd

Edition(NewYork:

McGrawHill,

2007).

Chapter10VaRMethods

Chapter11VaRMapping

Chapter14StressTesting

3. RobertL.McDonald,DerivativesMarkets,(Boston:AddisonWesley,2003).

Chapter6CommodityForwardsandFutures

4. AnthonySaundersandMarciaMillonCornett,FinancialInstitutionsManagement:ARiskManagement

Approach,5th

Edition(NewYork:McGrawHill,2005).

Chapter15ForeignExchangeRisk

5. RenStulz,RiskManagement&Derivatives(Mason,Ohio:SouthWestern,2003).

Chapter4AFirmWideApproachtoRiskManagement

Chapter8IdentifyingandManagingCashFlowExposures

Chapter15

The

Demand

and

Supply

for

Derivative

Products

6. BruceTuckman,FixedIncomeSecurities,2nd

Edition(Hoboken:Wiley&Sons,2002).

Chapter1BondPrices,DiscountFactors,andArbitrage

Chapter2BondPrices,SpotRates,andForwardRates

Chapter3YieldtoMaturity

Chapter4GeneralizationsandCurveFitting

Chapter5OneFactorMeasuresofPriceSensitivity

Chapter6MeasuresofPriceSensitivityBasedonParallelYieldShifts

Chapter7KeyRateandBucketExposures

Chapter9TheScienceofTermStructureModels

III. CreditRisk

Measurement

and

Management

25%

Bankruptcyanddefault

Creditspreads

Probabilityofdefault

Lossgivendefaultandrecoveryrates

Expectedandunexpectedloss

Creditscores

Externalcreditratings

Internalcreditratings

ContingentclaimapproachandtheKMVModel

Defaultanddefaulttimecorrelations

Portfoliocreditrisk

Creditriskmanagementmodels Riskmitigationtechniques(includingnetting,ratingtriggers,andcollateral)

Creditdefaultswaps

Securitization

Specialpurposevehicles

CollateralizedDebtObligations(pricingandriskmanagement)

Counterpartyrisk



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CreditRiskMeasurementandManagementReadings:

1. AdamAshcroftandTilSchuermann,UnderstandingtheSecuritizationofSubprimeMortgageCredit,2007.

Copyofarticleisavailableatwww.GARPDigitalLibrary.org.

2. EduardoCanabarroandDarrellDuffie,MeasuringandMarkingCounterpartyRiskinALMofFinancial

Institutions,ed.LeoTilman(London:EuromoneyInstitutionalInvestor,2003). Copyofarticleisavailableat

www.GARPDigitalLibrary.org.

3. ChristopherCulp,StructuredFinanceandInsurance:TheArtofManagingCapitalandRisk(Hoboken:Wiley&

Sons,2006).

Chapter16Securitization

4. ArnauddeServignyandOlivierRenault,MeasuringandManagingCreditRisk,(NewYork:McGrawHill,2004).

Chapter2ExternalandInternalRatings

Chapter3DefaultRisk:QuantitativeMethodologies

Chapter4LossGivenDefault

Chapter6CreditRiskPortfolioModels

Chapter7CreditRiskManagementandStrategicCapitalAllocation

5. AshishDev(editor),EconomicCapital,(London:RiskBooks,2004).

Chapter7EconomicCapitalforCounterpartyCreditRisk,byEvanPicoultandDavidLamb.

6. JohnHull,RiskManagementandFinancialInstitutions,(NewYork:PrenticeHall,2006).

Chapter13CreditDerivatives

7. Gunter

Meissner,CreditDerivatives,Application,PricingandRiskManagement

,

(Malden,

MA:

Blackwell

Publishing,2005).

Chapter3SyntheticStructures

8. MichaelOng,InternalCreditRiskModels:CapitalAllocationandPerformanceMeasurement,(London:Risk

Books,1999).

Chapter4LoanPortfoliosandExpectedLoss

Chapter5UnexpectedLoss

Chapter6PortfolioEffects:RiskContributionsandUnexpectedLosses

9. Saunders,FinancialInstitutionsManagement,5th

Edition.

Chapter11CreditRisk:IndividualLoanRisk

Chapter16SovereignRisk

10. Stulz,RiskManagement&Derivatives.

Chapter18CreditRisksandCreditDerivatives

IV. OperationalandIntegratedRiskManagement,Legal25%

Typesofoperationalrisk

Workflowinfinancialinstitutions

Insuringandhedgingoperationalrisk

Severityandfrequencydistributionsforoperationalrisk

Aggregateddistributions

1. Lossdistributions

2. Aggregatinglossdistributions

Firmwideriskmeasurementandmanagement

Correlationsacrossmarket,credit,andoperationalrisk

Differencesbetween

market

and

operational

VaRs

Definitionofriskcapital

Allocationofriskcapitalacrossthefirm

BaselIIAccord

Evaluatingtheperformanceofriskmanagementsystems

Implementationrisksofriskmanagement

Legalrisk

Liquidityrisk

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OperationalandIntegratedRiskManagement,LegalReadings:

1. Allen,Boudoukh,andSaunders,UnderstandingMarket,CreditandOperationalRisk.

Chapter5ExtendingtheVaRApproachtoOperationalRisk

2. FalkoAueandMichaelKalkbrener,2007,LDAatWork,DeutscheBankWhitePaper.Copyofthearticleis

availableatwww.GARPDigitalLibrary.org.

3. KlausBoeckerandClaudiaKluppelberg,2007,OperationalVaR:aClosedFormApproximation.Copyofthe

articleisavailableatwww.GARPDigitalLibrary.org.

4. MichaelCrouhy,

Dan

Galai,

and

Robert

Mark,

Risk

Management

(New

York:

McGraw

Hill,

2001).

Chapter14CapitalAllocationandPerformanceMeasurement

5. ChristopherCulp,TheRiskManagementProcess:BusinessStrategyandTactics(Hoboken:Wiley&Sons,2001).

Chapter17Identifying,Measuring,andMonitoringLiquidityRisk

6. EllenDavis(editor),OperationalRisk:PracticalApproachestoImplementation(London:RiskBooks,2005).

Chapter12AligningBaselIIOperationalRiskandSarbanesOxley404Projects,byNickBoltonandJudson

Berkey

7. deServignyandRenault,MeasuringandManagingCreditRisk.

Chapter10Regulation

8. KevinDowd,MeasuringMarketRisk,2nd

ed.,(WestSussex:Wiley&Sons,2005).

Chapter16 ModelRisk

9. RetoGallati,RiskManagementandCapitalAdequacy(NewYork:McGrawHill,2003).

Chapter

6

Case

Studies

10. AndrewKuritzkes,TilSchuermannandScottM.Weiner."RiskMeasurement,RiskManagementandCapital

AdequacyinFinancialConglomerates."BrookingsWhartonPapersonFinancialServices:2003.Ed.RobertE.

LitanandRichardHerring.WashingtonD.C.:BrookingsInstitutionalPress,2003. Copyofarticleisavailableat


11. BrianW.NoccoandRenM.Stulz,2006,EnterpriseRiskManagement:TheoryandPractice,Journalof

AppliedCorporateFinance18(4),820.Copyofthearticleisavailableatwww.GARPDigitalLibrary.org.

12. Saunders,FinancialInstitutionsManagement,5th

Edition.

Chapter14TechnologyandOtherOperationalRisks

13. Stulz,RiskManagement&Derivatives.

Chapter2InvestorsandRiskManagement

Chapter3CreatingValuewithRiskManagement

14. CounterpartyRiskManagementPolicyGroupII,July2005.TowardGreaterFinancialStability:APrivateSector

Perspective.The

Report

of

the

Counterparty

Risk

Management

Policy

Group

II.

Copy

of

the

full

report

is

availableatwww.GARPDigitalLibrary.org.

SectionI:Introduction

SectionII:ExecutiveSummaryandRecommendations

SectionIII:RiskManagementandRiskRelatedDisclosurePractices

BaselReferenceReadings:

CandidatesareexpectedtounderstandtheobjectiveandgeneralstructureoftheBasel IIAccordand

general application of the various approaches for calculating minimum capital requirements.

Candidatesarenotexpectedtomemorizespecificdetailssuchasriskweightsfordifferentassets.

1. BaselII:InternationalConvergenceofCapitalMeasurementandCapitalStandards:ARevisedFramework

Comprehensive

Version

(Basel

Committee

on

Banking

Supervision

Publication,

June

2006).

Copy

of

the

articleisavailableatwww.GARPDigitalLibrary.org.

2. Studiesoncreditriskconcentration:anoverviewoftheissuesandasynopsisoftheresultsfromthe

ResearchTaskForceproject(BaselCommitteeonBankingSupervisionPublication,November2006).

Copyofthearticleisavailableatwww.GARPDigitalLibrary.org.

3. AnExplanatoryNoteontheBaselIIIRBRiskWeightFunctions(BaselCommitteeonBankingSupervision

Publication,July2005). Copyofthearticleisavailableatwww.GARPDigitalLibrary.org.

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V. RiskManagementandInvestmentManagement10%

Traditionalinvestmentriskmanagement

Returnmetrics(Sharperatio,informationratio,VaR,relativeVaR,trackingerror,survivorshipbias)

ImplementingVaR

Benchmarkingassetmixes

Riskdecompositionandperformanceattribution

Riskbudgeting

Trackingerror

Settingrisklimits

Riskofalphatransferstrategies

Riskmanagementissuesofpensionfunds

Hedgefundriskmanagement

Riskreturnmetricsspecifictohedgefunds(drawdown,Sortinoratio)

Risksofspecificstrategies(fixedincomearbitrage,mergerarbitrage,convertarbitrage,equity

long/shortmarketneutral,macro,distresseddebt,emergingmarkets)

Assetilliquidity,valuation,andriskmeasurement

Theuseofleverageandderivativesandtheriskstheycreate

Measuringexposurestoriskfactors(dynamicstrategies,leverage,derivatives,styledrift)

Correlationsamonghedgefundsandbetweenhedgefundsandotherassets

RiskManagementandInvestmentManagementReadings;

1. NoelAmencandVeroniqueLeSourd,PortfolioTheoryandPerformanceAnalysis(Sussex:Wiley&Sons,2003).

Chapter4TheCapitalAssetPricingModelandItsApplicationtoPerformanceMeasurement

2. RichardGrinoldandRonaldKahn,ActivePortfolioManagement:AQuantitativeApproachforProducing

SuperiorReturnsandControllingRisk,2nd

Edition,(NewYork:McGrawHill,1999).

Chapter17PerformanceAnalysis

3. LarsJaeger(editor),TheNewGenerationofRiskManagementforHedgeFundsandPrivateEquityInvestments,

(London:EuromoneyInstitutionalInvestor,2003).

Chapter6FundsofHedgeFunds,bySohailJaffer

Chapter27StyleDrifts:Monitoring,DetectionandControl,byPierreYvesMoix

4. LarsJaeger,ThroughtheAlphaSmokeScreens:AGuidetoHedgeFundReturns,(London:Euromoney,2005).

Chapter

5

Individual

Hedge

Fund

Strategies

5. Jorion,ValueatRisk,3rd

Edition.

Chapter7PortfolioRisk:AnalyticalMethods

Chapter17VaRandRiskBudgetinginInvestmentManagement

6. JasminaHasanhodzicy andAndrewLo,"CanHedgeFundReturnsbeReplicated?: TheLinearCase".(Aug.2006).

AvailableatSSRN:http://ssrn.com/abstract=924565.Copyofarticleavailableatwww.GARPDigitalLibrary.org.

7. AmirE.KhandaniandAndrewLo,"WhathappenedtotheQuantsinAugust2007?"(Nov.4,2007).Availableat

SSRN:http://ssrn.com/abstract=1015987.Copyofarticleavailableatwww.GARPDigitalLibrary.org.

8. PresidentsWorkingGrouponFinancialMarkets,AgreementamongPWGandU.S.AgencyPrincipalson

PrinciplesandGuidelinesRegardingPrivatePoolsofCapital,February2007. Copyofthearticleisavailableat


9. RenM.Stulz,"HedgeFunds:Past,PresentandFuture".ForthcomingintheJournalofEconomicPerspectives,

Spring2007. Copyofarticleavailableatwww.GARPDigitalLibrary.org.

2008FRMCommitteemembers: thefollowingindividualsweremembersoftheCommitteeresponsiblefordeveloping

the2008FRMStudyGuide: Dr.RenStulz,Chairman,FRMCommittee,OhioStateUniversity;RichardApostolik,Global

AssociationofRiskProfessionals;JuanCarlosGarciaCespedes,BancoBilbaoVizcayaArgentaria;Dr.Christopher

Donohue,GlobalAssociationofRiskProfessionals;HervGeny,ICAP;KaiLeifert,CreditSuisseAssetManagement;Steve

Lerit,CFA,NewYorkLifeInvestmentManagement;MichelleMcCarthy,WashingtonMutualBank;Dr.SusanMangiero,

BVA,LLC;MichaelB.Miller,FortressInvestmentGroup;EzraUziMoualem,TheFinancialInstituteofIsrael;Dr.Victor

Ng,Goldman,Sachs&Co;Dr.ElliotNoma,AssetAllianceCorporation;RobertScanlon,StandardCharteredBank;Serge

Sverdlov,MicrosoftCorporation;AlanWeindorf,FinancialConsultant.
http://ssrn.com/abstract=924565http://www.garpdigitallibrary.org/http://ssrn.com/abstract=1015987http://www.garpdigitallibrary.org/http://www.garpdigitallibrary.org/http://www.garpdigitallibrary.org/http://www.garpdigitallibrary.org/http://www.garpdigitallibrary.org/http://www.garpdigitallibrary.org/http://ssrn.com/abstract=1015987http://www.garpdigitallibrary.org/http://ssrn.com/abstract=924565

Documents

2008 Frm Study Guide