2008 Frm Study Guide
Transcript of 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.
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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
www.GARPDigitalLibrary.org.
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
www.GARPDigitalLibrary.org.
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