part i frm - efficientlearning.com · journal of economic perspectives 23:1, 77—100 frm-7 frm-7...

PART I FRM2020 CURRICULUM UPDATES

See updates to the 2020 PART I FRM program curriculum.

GARP updates the program curriculum every year to ensure study materials and exams refl ect the most up-to-date knowledge and skills required to be successful as a risk professional.

2019 2020

Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, 2nd Edition (New

York: McGraw-Hill, 2014). Chapter 1. Risk Management: A Helicopter View (Including Appendix 1.1)

Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, 2nd Edition (New

York: McGraw-Hill, 2014). Chapter 1. Risk Management: A Helicopter View (Including Appendix 1.1)

FRM-1 FRM-1

• Explaintheconceptofriskandcompareriskmanagementwithrisktaking.

• Describetheriskmanagementprocessandidentifyproblemsandchallengesthatcanariseintheriskmanagementprocess.

• Evaluateandapplytoolsandproceduresusedtomeasureandmanagerisk,includingquantitativemeasures,qualitativeassessment,andenterpriseriskmanagement.

• Distinguishbetweenexpectedlossandunexpectedloss,andprovideexamplesofeach.

• Interprettherelationshipbetweenriskandrewardandexplainhowconflictsofinterestcanimpactriskmanagement.

• Describeanddifferentiatebetweenthekeyclassesofrisks,explainhoweachtypeofriskcanarise,andassessthepotentialimpactofeachtypeofriskonanorganization.

• Explaintheconceptofriskandcompareriskmanagementwithrisktaking.

• NEW:Describeelements,orbuildingblocks,oftheriskmanagementprocessandidentifyproblemsandchallengesthatcanariseintheriskmanagementprocess.

• Evaluateandapplytoolsandproceduresusedtomeasureandmanagerisk,includingquantitativemeasures,qualitativeassessment,andenterpriseriskmanagement.

• Distinguishbetweenexpectedlossandunexpectedloss,andprovideexamplesofeach.

• Interprettherelationshipbetweenriskandrewardandexplainhowconflictsofinterestcanimpactriskmanagement.

• Describeanddifferentiatebetweenthekeyclassesofrisks,explainhoweachtypeofriskcanarise,andassessthepotentialimpactofeachtypeofriskonanorganization.

• NEW:Explainhowriskfactorscaninteractwitheachotheranddescribechallengesinaggregatingriskexposures.

!

!

2019 2020

Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management,

2nd Edition (New York: McGraw-Hill, 2014). Chapter 2. Corporate Risk Management: A Primer

Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management,

2nd Edition (New York: McGraw-Hill, 2014). Chapter 2. Corporate Risk Management: A Primer

FRM-2 FRM-2

• Evaluatesomeadvantagesanddisadvantagesofhedgingriskexposures.

• Explainconsiderationsandproceduresindeterminingafirm’sriskappetiteanditsbusinessobjectives.

• Explainhowacompanycandeterminewhethertohedgespecificriskfactors,includingtheroleoftheboardofdirectorsandtheprocessofmappingrisks.

• Applyappropriatemethodstohedgeoperationalandfinancialrisks,includingpricing,foreigncurrencyandinterestraterisk.

• Assesstheimpactofriskmanagementinstruments.

• NEW:Comparedifferentstrategiesafirmcanusetomanageitsriskexposuresandexplainsituationsinwhichafirmwouldwanttouseeachstrategy.

• NEW:Explaintherelationshipbetweenriskappetiteandafirm’sriskmanagementdecisions.

• NEW:Evaluatesomeadvantagesanddisadvantagesofhedgingriskexposures,andexplainchallengesthatcanarisewhenimplementingahedgingstrategy.

• Applyappropriatemethodstohedgeoperationalandfinancialrisks,includingpricing,foreigncurrency,andinterestraterisk.

• NEW:Assesstheimpactofriskmanagementtoolsandinstruments,includingrisklimitsandderivatives.

!

!

!

!

2019 2020

Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, 2nd Edition

(New York: McGraw-Hill, 2014). Chapter 4. Corporate Governance and Risk Management

Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, 2nd Edition

(New York: McGraw-Hill, 2014). Chapter 4. Corporate Governance and Risk Management

FRM-3 FRM-3

• Compareandcontrastbestpracticesincorporategovernancewiththoseofriskmanagement.

• Assesstheroleandresponsibilitiesoftheboardofdirectorsinriskgovernance.

• Evaluatetherelationshipbetweenafirm’sriskappetiteanditsbusinessstrategy,includingtheroleofincentives.

• Distinguishthedifferentmechanismsfortransmittingriskgovernancethroughoutanorganization.

• Illustratetheinterdependenceoffunctionalunitswithinafirmasitrelatestoriskmanagement.

• Assesstheroleandresponsibilitiesofafirm’sauditcommittee.

• NEW:Explainchangesincorporateriskgovernancethatoccurredasaresultofthe2007—2009financialcrisis.

• Compareandcontrastbestpracticesincorporategovernancewiththoseofriskmanagement.

• Assesstheroleandresponsibilitiesoftheboardofdirectorsinriskgovernance.

• Evaluatetherelationshipbetweenafirm’sriskappetiteanditsbusinessstrategy,includingtheroleofincentives.

• Illustratetheinterdependenceoffunctionalunitswithinafirmasitrelatestoriskmanagement.

• Assesstheroleandresponsibilitiesofafirm’sauditcommittee.

!

2019 2020

James Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2014).

Chapter 4. What is ERM?



FRM-4 FRM-4

• Describeenterpriseriskmanagement(ERM)andcompareandcontrastdifferingdefinitionsofERM.

• ComparethebenefitsandcostsofERManddescribethemotivationsforafirmtoadoptanERMinitiative.

• Describetheroleandresponsibilitiesofachiefriskofficer(CRO)andassesshowtheCROshouldinteractwithotherseniormanagement.

• DistinguishbetweencomponentsofanERMprogram

• NEW:Comparedifferenttypesofcreditderivatives,explainhoweachonetransferscreditrisk,anddescribetheiradvantagesanddisadvantages.

• NEW:Explaindifferenttraditionalapproachesormechanismsthatfirmscanusetohelpmitigatecreditrisk.

• NEW:Evaluatetheroleofcreditderivativesinthe2007—2009financialcrisis,andexplainchangesinthecreditderivativemarketthatoccurredasaresultofthecrisis.

• NEW:Explaintheprocessofsecuritization,describeaspecialpurposevehicle(SPV),andassesstheriskofdifferentbusinessmodelsthatbankscanuseforsecuritizedproducts.

!

!

!

!

2019 2020

Elton, Gruber, Brown and Goetzmann, Modern Portfolio Theory and Investment Analysis,

9th Edition, Chapter 13. Amenc and Le Sourd,

Portfolio Theory and Performance Analysis. Chapter 4.

René Stulz, Risk Management, Governance, Culture and Risk Taking in Banks,

FRBNY Economic Policy Review, (August 2016): 43-59.

FRM-5 FRM-5

• Assessmethodsthatbankscanusetodeterminetheiroptimallevelofriskexposure,andexplainhowtheoptimallevelofriskcandifferacrossbanks

• Describeimplicationsforabankifittakestoolittleortoomuchriskcomparedtoitsoptimallevel

• Explainwaysinwhichriskmanagementcanaddordestroyvalueforabank

• Describestructuralchallengesandlimitationstoeffectiveriskmanagement,includingtheuseofVaRinsettinglimits.

• Assessthepotentialimpactofabank’sgovernance,incentivestructureandriskcultureonitsriskprofileanditsperformance

• NEW:ExplainmodernportfoliotheoryandinterprettheMarkowitzefficientfrontier.

• UnderstandthederivationandcomponentsoftheCAPM.

• DescribetheassumptionsunderlyingtheCAPM.

• Interpretthecapitalmarketline.

• ApplytheCAPMincalculatingtheexpectedreturnonanasset.

• Interpretbetaandcalculatethebetaofasingleassetorportfolio.

• Calculate,compare,andinterpretthefollowingperformancemeasures:theSharpeperformanceindex,theTreynorperformanceindex,theJensenperformanceindex,thetrackingerror,informationratio,andSortinoratio.

!

2019 2020

Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 10th Edition (New York: McGraw-Hill, 2013).

Chapter 10. Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Steve Allen, Financial Risk Management: A Practitioner’s Guide to Managing Market and Credit

Risk, 2nd Edition (New York: John Wiley & Sons, 2013). Chapter 4. Financial Disasters

FRM-6 FRM-6

• Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromthefollowingriskmanagementcasestudies:ChaseManhattanandtheirinvolvementwithDrysdaleSecurities,KidderPeabody,Barings,AlliedIrishBank,UnionBankofSwitzerland,SociétéGénérale,LongTermCapitalManagement,Metallgesellschaft,BankersTrust,JPMorgan,Citigroup,andEnron

• NEW:Explainthearbitragepricingtheory(APT),describeitsassumptions,andcomparetheAPTtotheCAPM.

• Describetheinputs(includingfactorbetas)toamultifactormodel.

• Calculatetheexpectedreturnofanassetusingasingle-factorandamultifactormodel.

• NEW:Explainmodelsthataccountforcorrelationsbetweenassetreturnsinamulti-assetportfolio.

• Explainhowtoconstructaportfoliotohedgeexposuretomultiplefactors.

• DescribeandapplytheFama-Frenchthreefactormodelinestimatingassetreturns.

!

!

2019 2020

Principles for Effective Data Aggregation and Risk Reporting,

(Basel Committee on Banking Supervision Publication, January 2013).

Markus K. Brunnermeir, 2009. Deciphering the Liquidity and Credit Crunch 2007—2008,

Journal of Economic Perspectives 23:1, 77—100

FRM-7 FRM-7

• Explainthepotentialbenefitsofhavingeffectiveriskdataaggregationandreporting.

• NEW:Describetheimpactofdataqualityonmodelriskandthemodeldevelopmentprocess.

• Describekeygovernanceprinciplesrelatedtoriskdataaggregationandriskreportingpractices.

• NEW:Identifythegovernanceframework,riskdataarchitectureandITinfrastructurefeaturesthatcancontributetoeffectiveriskdataaggregationandriskreportingpractices.

• Describecharacteristicsofastrongriskdataaggregationcapabilityanddemonstratehowthesecharacteristicsinteractwithoneanother.

• Describecharacteristicsofeffectiveriskreportingpractices.

• Describetherolethatsupervisorsplayinthemonitoringandimplementationoftheriskdataaggregationandreportingpractices.

• Describethekeyfactorstheledtothehousingbubble.

• Explainthebankingindustrytrendsleadinguptotheliquiditysqueezeandassessthetriggersfortheliquiditycrisis.

• Explainthepurposesandusesofcreditdefaultswaps.

• Describehowsecuritizedandstructuredproductswereusedbyinvestorgroupsanddescribetheconsequencesoftheirincreaseduse.

• Describehowthefinancialcrisistriggeredaseriesofworldwidefinancialandeconomicconsequences.

• Distinguishbetweenfundingliquidityandmarketliquidityandexplainhowtheevaporationofliquiditycanleadtoafinancialcrisis.

• Analyzehowanincreaseincounterpartycreditriskcangenerateadditionalfundingneedsandpossiblesystemicrisk

!

!

2019 2020



Gary Gorton and Andrew Metrick, 2012. Getting Up to Speed on the Financial Crisis:

A One-Weekend-Reader’s Guide, Journal of Economic Literature 50:1, 128—150.

FRM-8 FRM-8

• Distinguishbetweentriggersandvulnerabilitiesthatledtothefinancialcrisisandtheircontributionstothecrisis.

• Describethemainvulnerabilitiesofshort-termdebtespeciallyrepoagreementsandcommercialpaper.

• AssesstheconsequencesoftheLehmanfailureontheglobalfinancialmarkets.

• Describethehistoricalbackgroundleadingtotherecentfinancialcrisis.

• Distinguishbetweenthetwomainpanicperiodsofthefinancialcrisisanddescribethestateofthemarketsduringeach.

• Assessthegovernmentalpolicyresponsestothefinancialcrisisandreviewtheirshort-termimpact.

• Describetheglobaleffectsofthefinancialcrisisonfirmsandtherealeconomy

• NEW:DescribeEnterpriseRiskManagement(ERM)andcompareanERMprogramwithatraditionalsilo-basedriskmanagementprogram.

• ComparethebenefitsandcostsofERManddescribethemotivationsforafirmtoadoptanERMinitiative.

• NEW:ExplainbestpracticesforthegovernanceandimplementationofanERMprogram.

• NEW:DescribeimportantdimensionsofanERMprogramandrelateERMtostrategicplanning.

• NEW:Describeriskculture,explaincharacteristicsofastrongcorporateriskculture,anddescribechallengestotheestablishmentofastrongriskcultureatafirm.

• NEW:ExplaintheroleofscenarioanalysisintheimplementationofanERMprogramanddescribeitsadvantagesanddisadvantages.

• NEW:Explaintheuseofscenarioanalysisinstresstestingprogramsandincapitalplanning.

!

!

!

!

!

!

2019 2020

René Stulz, Risk Management Failures: What are They and When Do They Happen?

Fisher College of Business Working Paper Series, October 2008.

René Stulz, Risk Management Failures: What are They and When Do They Happen?

Fisher College of Business Working Paper Series, October 2008.

FRM-9 FRM-9

• Explainhowalargefinanciallossmaynotnecessarilybeevidenceofariskmanagementfailure.

• Analyzeandidentifyinstancesofriskmanagementfailure.

• Explainhowriskmanagementfailurescanariseinthefollowingareas:measurementofknownriskexposures,identificationofriskexposures,communicationofrisks,andmonitoringofrisks.

• Evaluatetheroleofriskmetricsandanalyzetheshortcomingsofexistingriskmetrics.

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Interestraterisk,includingthe1980ssavingsandloancrisisintheUS

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Fundingliquidityrisk,includingLehmanBrothers,ContinentalIllinois,andNorthernRock

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Implementinghedgingstrategies,includingtheMetallgesellschaftcase

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Modelrisk,includingtheNiederhoffercase,LongTermCapitalManagement,andtheLondonWhalecase

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Roguetradingandmisleadingreporting,includingtheBaringscase

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Financialengineeringandcomplexderivatives,includingBankersTrust,theOrangeCountycase,andSachsenLandesbank

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Reputationalrisk,includingtheVolkswagencase

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Corporategovernance,includingtheEnroncase

• NEW:Analyzethekeyfactorsthatledtoandderivethelessonslearnedfromcasestudiesinvolvingthefollowingriskfactor:Cyberrisk,includingtheSWIFTcase

!

!

!

!

!

!

!

!

!

2019 2020

Edwin J. Elton, Martin J. Gruber, Stephen J. Brown and William N. Goetzmann,

Modern Portfolio Theory and Investment Analysis, 9th Edition (Hoboken, NJ: John Wiley & Sons, 2014).

Chapter 13. The Standard Capital Asset Pricing Model

Edwin J. Elton, Martin J. Gruber, Stephen J. Brown and William N. Goetzmann,

Modern Portfolio Theory and Investment Analysis, 9th Edition (Hoboken, NJ: John Wiley & Sons, 2014).

Chapter 13. The Standard Capital Asset Pricing Model

FRM-10 FRM-10

• UnderstandthederivationandcomponentsoftheCAPM.

• DescribetheassumptionsunderlyingtheCAPM.

• Interpretthecapitalmarketline.

• ApplytheCAPMincalculatingtheexpectedreturnonanasset.

• Interpretbetaandcalculatethebetaofasingleassetorportfolio.

• NEW:Describethehistoricalbackgroundandprovideanoverviewofthe2007—2009financialcrisis.

• NEW:Describethebuild-uptothefinancialcrisisandthefactorsthatplayedanimportantrole.

• NEW:Explaintheroleofsubprimemortgagesandcollateralizeddebtobligations(CDOs)inthecrisis.

• NEW:Comparetherolesofdifferenttypesofinstitutionsinthefinancialcrisis,includingbanks,financialintermediaries,mortgagebrokersandlenders,andratingagencies.

• NEW:Describetrendsintheshort-termwholesalefundingmarketsthatcontributedtothefinancialcrisis,includingtheirimpactonsystemicrisk.

• NEW:Describeresponsestakenbycentralbanksinresponsetothecrisis.

!

!

!

!

!

!

2019 2020

GARP Code of Conduct

Noel Amenc and Veronique Le Sourd, Portfolio Theory and Performance Analysis (West Sussex, England: John

Wiley & Sons, 2003). Chapter 4. Applying the CAPM to Performance Measurement: Single-Index Performance

Measurement Indicators (Section 4.2 only)

FRM-11 FRM-11

• Calculate,compare,andevaluatetheTreynormeasure,theSharpemeasure,andJensen’salpha.

• Computeandinterprettrackingerror,theinformationratio,andtheSortinoratio.

• DescribetheresponsibilityofeachGARPmemberwithrespecttoprofessionalintegrity,ethicalconduct,conflictsofinterest,confidentialityofinformationandadherencetogenerallyacceptedpracticesinriskmanagement.

• DescribethepotentialconsequencesofviolatingtheGARPCodeofConduct.

2019 2020

Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).

Chapter 2. Probabilities


Chapter 2. Probabilities

QA-1 QA-1

• Describeanddistinguishbetweencontinuousanddiscreterandomvariables.

• Defineanddistinguishbetweentheprobabilitydensityfunction,thecumulativedistributionfunction,andtheinversecumulativedistributionfunction.

• Calculatetheprobabilityofaneventgivenadiscreteprobabilityfunction.

• Distinguishbetweenindependentandmutuallyexclusiveevents.

• Definejointprobability,describeaprobabilitymatrix,andcalculatejointprobabilitiesusingprobabilitymatrices.

• Defineandcalculateaconditionalprobability,anddistinguishbetweenconditionalandunconditionalprobabilities.

• NEW:Describeaneventandaneventspace.

• Describeindependenteventsandmutuallyexclusiveevents.

• NEW:Explainthedifferencebetweenindependenteventsandconditionallyindependentevents.

• Calculatetheprobabilityofaneventforadiscreteprobabilityfunction.

• NEW:Defineandcalculateaconditionalprobability.

• NEW:Distinguishbetweenconditionalandunconditionalprobabilities.

• NEW:ExplainandapplyBayes’rule.

!

!

!!

!

2019 2020


Chapter 3. Basic Statistics


Chapter 3. Basic Statistics

QA-2 QA-2

• Interpretandapplythemean,standarddeviation,andvarianceofarandomvariable.

• Calculatethemean,standarddeviation,andvarianceofadiscreterandomvariable

• Interpretandcalculatetheexpectedvalueofadiscreterandomvariable.

• Calculateandinterpretthecovarianceandcorrelationbetweentworandomvariables.

• Calculatethemeanandvarianceofsumsofvariables.

• Describethefourcentralmomentsofastatisticalvariableordistribution:mean,variance,skewnessandkurtosis.

• Interprettheskewnessandkurtosisofastatisticaldistribution,andinterprettheconceptsofcoskewnessandcokurtosis.

• Describeandinterpretthebestlinearunbiasedestimator.

• NEW:Describeanddistinguishaprobabilitymassfunctionfromacumulativedistributionfunction,andexplaintherelationshipbetweenthesetwo.

• NEW:Understandandapplytheconceptofamathematicalexpectationofarandomvariable.

• NEW:Describethefourcommonpopulationmoments.

• NEW:Explainthedifferencesbetweenaprobabilitymassfunctionandaprobabilitydensityfunction.

• NEW:Characterizethequantilefunctionandquantile-basedestimators.

• NEW:Explaintheeffectofalineartransformationofarandomvariableonthemean,variance,standarddeviation,skewness,kurtosis,median,andinterquartilerange.

!

!

!!

!

!

2019 2020


Chapter 4. Distributions


Chapter 4. Distributions

QA-3 QA-3

• Distinguishthekeypropertiesamongthefollowingdistributions:uniformdistribution,Bernoullidistribution,Binomialdistribution,Poissondistribution,normaldistribution,lognormaldistribution,Chisquareddistribution,Student’st,andF-distributions,andidentifycommonoccurrencesofeachdistribution.

• Describethecentrallimittheoremandtheimplicationsithaswhencombiningi.i.d.randomvariables.

• Describeindependentandidenticallydistributed(i.i.d)randomvariablesandtheimplicationsofthei.i.d.assumptionwhencombiningrandomvariables.

• Describeamixturedistributionandexplainthecreationandcharacteristicsofmixturedistributions.

• Distinguishthekeypropertiesandidentifythecommonoccurrencesofthefollowingdistributions:uniformdistribution,Bernoullidistribution,binomialdistribution,Poissondistribution,normaldistribution,lognormaldistribution,Chi-squareddistribution,Student’st,andF-distributions.

• Describeamixturedistributionandexplainthecreationandcharacteristicsofmixturedistributions.

2019 2020


Chapter 6. Bayesian Analysis (pp. 113-124 only)


Chapter 6. Bayesian Analysis (pp. 113-124 only)

QA-4 QA-4

• DescribeBayes’theoremandapplythistheoreminthecalculationofconditionalprobabilities.

• ComparetheBayesianapproachtothefrequentistapproach.

• ApplyBayes’theoremtoscenarioswithmorethantwopossibleoutcomesandcalculateposteriorprobabilities.

• NEW:Explainhowaprobabilitymatrixcanbeusedtoexpressaprobabilitymassfunction.

• NEW:Computethemarginalandconditionaldistributionsofadiscretebivariaterandomvariable.

• NEW:Explainhowtheexpectationofafunctioniscomputedforabivariatediscreterandomvariable.

• NEW:Definecovarianceandexplainwhatitmeasures.

• NEW:Explaintherelationshipbetweenthecovarianceandcorrelationoftworandomvariables,andhowthesearerelatedtotheindependenceofthetwovariables.

• NEW:Explaintheeffectsofapplyinglineartransformationsonthecovarianceandcorrelationbetweentworandomvariables.

• NEW:Computethevarianceofaweightedsumoftworandomvariables.

• NEW:Computetheconditionalexpectationofacomponentofabivariaterandomvariable.

• NEW:Describethefeaturesofaniidsequenceofrandomvariables.

• NEW:Explainhowtheiidpropertyishelpfulincomputingthemeanandvarianceofasumofiidrandomvariables.

!

!

!

!

!

!

!

!

!

!

2019 2020


Chapter 7. Hypothesis Testing and Confidence Intervals


Chapter 7. Hypothesis Testing and Confidence Intervals

QA-5 QA-5

• Calculateandinterpretthesamplemeanandsamplevariance.

• Constructandinterpretaconfidenceinterval.

• Constructanappropriatenullandalternativehypothesis,andcalculateanappropriateteststatistic.

• Differentiatebetweenaone-tailedandatwo-tailedtestandidentifywhentouseeachtest.

• Interprettheresultsofhypothesistestswithaspecificlevelofconfidence.

• DemonstratetheprocessofbacktestingVaRbycalculatingthenumberofexceedances.

• NEW:Estimatethemean,variance,andstandarddeviationusingsampledata.

• NEW:Explainthedifferencebetweenapopulationmomentandasamplemoment.

• NEW:Distinguishbetweenanestimatorandanestimate.

• NEW:Describethebiasofanestimatorandexplainwhatthebiasmeasures.

• NEW:ExplainwhatismeantbythestatementthatthemeanestimatorisBLUE.

• NEW:Describetheconsistencyofanestimatorandexplaintheusefulnessofthisconcept.

• NEW:ExplainhowtheLawofLargeNumbers(LLN)andCentralLimitTheorem(CLT)applytothesamplemean.

• NEW:Estimateandinterprettheskewnessandkurtosisofarandomvariable.

• NEW:Usesampledatatoestimatequantiles,includingthemedian.

• NEW:EstimatethemeanoftwovariablesandapplytheCLT.

• NEW:Estimatethecovarianceandcorrelationbetweentworandomvariables.

• NEW:Explainhowcoskewnessandcokurtosisarerelatedtoskewnessandkurtosis.

!

!

!

!

!

!

!!

!

!

!!

2019 2020

James Stock and Mark Watson, Introduction to Econometrics, Brief Edition (Boston: Pearson, 2008).

Chapter 4. Linear Regression with One Regressor

James Stock and Mark Watson, Introduction to Econometrics, Brief Edition (Boston: Pearson, 2008).

Chapter 4. Linear Regression with One Regressor

QA-6 QA-6

• Explainhowregressionanalysisineconometricsmeasurestherelationshipbetweendependentandindependentvariables.

• Interpretapopulationregressionfunction,regressioncoefficients,parameters,slope,intercept,andtheerrorterm.

• Interpretasampleregressionfunction,regressioncoefficients,parameters,slope,intercept,andtheerrorterm.

• Describethekeypropertiesofalinearregression

• Defineanordinaryleastsquares(OLS)regressionandcalculatetheinterceptandslopeoftheregression.

• DescribethemethodandthreekeyassumptionsofOLSforestimationofparameters.

• SummarizethebenefitsofusingOLSestimators

• DescribethepropertiesofOLSestimatorsandtheirsamplingdistributions,andexplainthepropertiesofconsistentestimatorsingeneral.

• Interprettheexplainedsumofsquares,thetotalsumofsquares,theresidualsumofsquares,thestandarderroroftheregression,andtheregressionR2.

• InterprettheresultsofanOLSregression

• NEW:Constructanappropriatenullhypothesisandalternativehypothesisanddistinguishbetweenthetwo.

• NEW:Differentiatebetweenaone-sidedandatwo-sidedtestandidentifywhentouseeachtest.

• NEW:ExplainthedifferencebetweenTypeIandTypeIIerrorsandhowtheserelatetothesizeandpowerofatest.

• NEW:Understandhowahypothesistestandaconfidenceintervalarerelated.

• NEW:Explainwhatthep-valueofahypothesistestmeasures.

• NEW:Interprettheresultsofhypothesistestswithaspecificlevelofconfidence.

• NEW:Identifythestepstotestahypothesisaboutthedifferencebetweentwopopulationmeans.

• NEW:Explaintheproblemofmultipletestingandhowitcanbiasresults.

!

!

!

!

!

!!

!

2019 2020

James Stock and Mark Watson, Introduction to Econometrics, Brief Edition

(Boston: Pearson Education, 2008). Chapter 5. Regression with a Single Regressor


(Boston: Pearson Education, 2008). Chapter 5. Regression with a Single Regressor

QA-7 QA-7

• Calculate,andinterpretconfidenceintervalsforregressioncoefficients.

• Interpretthep-value.

• Interprethypothesistestsaboutregressioncoefficients.

• Evaluatetheimplicationsofhomoskedasticityandheteroskedasticity.

• DeterminetheconditionsunderwhichtheOLSisthebestlinearconditionallyunbiasedestimator.

• ExplaintheGauss-MarkovTheoremanditslimitations,andalternativestotheOLS.

• Applyandinterpretthet-statisticwhenthesamplesizeissmall.

• Describethemodelswhichcanbeestimatedusinglinearregressionanddifferentiatethemfromthosewhichcannot.

• InterprettheresultsofanOLSregressionwithasingleexplanatoryvariable.

• DescribethekeyassumptionsofOLSparameterestimation.

• CharacterizethepropertiesofOLSestimatorsandtheirsamplingdistributions.

• Construct,apply,andinterprethypothesistestsandconfidenceintervalsforasingleregressioncoefficientinaregression.

• Explainthestepsneededtoperformahypothesistestinalinearregression.

• Describetherelationshipbetweenat-statistic,it’sp-value,andaconfidenceinterval.

!

!

!

!

!!

!

2019 2020


(Boston: Pearson Education, 2008). Chapter 6. Linear Regression with Multiple Regressors


(Boston: Pearson Education, 2008). Chapter 6. Linear Regression with Multiple Regressors

QA-8 QA-8

• Defineandinterpretomittedvariablebias,anddescribethemethodsforaddressingthisbias.

• Distinguishbetweensingleandmultipleregression.

• Interprettheslopecoefficientinamultipleregression.

• Describehomoskedasticityandheterosckedasticityinamultipleregression.

• DescribetheOLSestimatorinamultipleregression.

• Calculateandinterpretmeasuresoffitinmultipleregression.

• Explaintheassumptionsofthemultiplelinearregressionmodel.

• Explaintheconceptofimperfectandperfectmulticollinearityandtheirimplications.

• NEW:Distinguishbetweentherelativeassumptionsofsingleandmultipleregression.

• NEW:Interpretregressioncoefficientsinamultipleregression.

• NEW:Interpretgoodnessoffitmeasuresforsingleandmultipleregressions,includingR2andadjusted-R2.

• NEW:Construct,apply,andinterpretjointhypothesistestsandconfidenceintervalsformultiplecoefficientsinaregression.

!

!

!!

2019 2020


(Boston: Pearson Education, 2008). Chapter 7. Hypothesis Tests and Confidence Intervals in

Multiple Regression


(Boston: Pearson Education, 2008). Chapter 7. Hypothesis Tests and Confidence Intervals in

Multiple Regression

QA-9 QA-9

• Construct,apply,andinterprethypothesistestsandconfidenceintervalsforasinglecoefficientinamultipleregression.

• Construct,apply,andinterpretjointhypothesistestsandconfidenceintervalsformultiplecoefficientsinamultipleregression.

• InterprettheF-statistic.

• Interprettestsofasinglerestrictioninvolvingmultiplecoefficients.

• Interpretconfidencesetsformultiplecoefficients.

• Identifyexamplesofomittedvariablebiasinmultipleregressions.

• InterprettheR2andadjusted-R2inamultipleregression.

• NEW:Explainhowtotestwhetheraregressionisaffectedbyheteroskedasticity.

• NEW:Describeapproachestousingheteroskedasticdata.

• NEW:Characterizemulticollinearityanditsconsequences;distinguishbetweenmulticollinearityandperfectcollinearity.

• NEW:Describetheconsequencesofexcludingarelevantexplanatoryvariablefromamodelandcontrastthosewiththeconsequencesofincludinganirrelevantregressor.

• NEW:Explaintwomodelselectionproceduresandhowtheserelatetothebias-variancetrade-off.

• NEW:Describethevariousmethodsofvisualizingresidualsandtheirrelativestrengths.

• NEW:Describemethodsforidentifyingoutliersandtheirimpact.

• NEW:DeterminetheconditionsunderwhichOLSisthebestlinearunbiasedestimator.

!

!

!

!

!!

!!

2019 2020

Francis X. Diebold, Elements of Forecasting, 4th Edition (Mason, Ohio: Cengage Learning, 2006).

Chapter 7. Characterizing CyclesChapter 8. Modeling Cycles: MA, AR, and ARMA Models


Chapter 5. Modeling and Forecasting Trend

QA-10 QA-10

• Describelinearandnonlineartrends.

• Describetrendmodelstoestimateandforecasttrends.

• Compareandevaluatemodelselectioncriteria,includings2,theAkaikeinformationcriterion(AIC),andtheSchwarzinformationcriterion(SIC).

• Explainthenecessaryconditionsforamodelselectioncriteriontodemonstrateconsistency.

• Describetherequirementsforaseriestobecovariancestationary.

• NEW:Definetheautocovariancefunctionandtheautocorrelationfunction.

• Definewhitenoise,describeindependentwhitenoiseandnormal(Gaussian)whitenoise.

• NEW:Defineanddescribethepropertiesofautoregressive(AR)processes.

• NEW:Defineanddescribethepropertiesofmovingaverage(MA)processes.

• Explainhowalagoperatorworks.

• NEW:Explainmeanreversionandcalculateamean-revertinglevel.

• Defineanddescribethepropertiesofautoregressivemovingaverage(ARMA)processes.

• NEW:DescribetheapplicationofAR,MA,andARMAprocesses.

• NEW:Describesampleautocorrelationandpartialautocorrelation.

• NEW:DescribetheBox-PierceQ-statisticandtheLjung-BoxQstatistic.

• NEW:ExplainhowforecastsaregeneratedfromARMAmodels.

• NEW:Describetheroleofmeanreversioninlong-horizonforecasts.

• NEW:Explainhowseasonalityismodeledinacovariance-stationaryARMA.

!

!

!!

!

!!

!

!

!

2019 2020


Chapter 5. Modeling and Forecasting TrendChapter 6. Modeling and Forecasting Seasonality


Chapter 6. Modeling and Forecasting Seasonality

QA-11 QA-11

• Describethesourcesofseasonalityandhowtodealwithitintimeseriesanalysis

• Explainhowtouseregressionanalysistomodelseasonality

• Explainhowtoconstructanh-step-aheadpointforecast

• Describelinearandnonlineartimetrends.

• Explainhowtouseregressionanalysistomodelseasonality.

• NEW:Describearandomwalkandaunitroot.

• NEW:Explainthechallengesofmodelingtimeseriescontainingunitroots.

• NEW:Describehowtotestifatimeseriescontainsaunitroot.

• NEW:Explainhowtoconstructanh-step-aheadpointforecastforatimeserieswithseasonality.

• NEW:Calculatetheestimatedtrendvalueandformanintervalforecastforatimeseries.

!!

!!

!

2019 2020

John C. Hull, Risk Management and Financial Institutions, 4th Edition

(Hoboken, NJ: John Wiley & Sons, 2015). Chapter 10. Volatility

Chapter 11. Correlations and Copulas


Chapter 7. Characterizing Cycles

QA-12 QA-12

• Definecovariancestationary,autocovariancefunction,autocorrelationfunction,partialautocorrelationfunctionandautoregression.

• Describetherequirementsforaseriestobecovariancestationary.

• Explaintheimplicationsofworkingwithmodelsthatarenotcovariancestationary.

• Definewhitenoise,describeindependentwhitenoiseandnormal(Gaussian)whitenoise.

• Explainthecharacteristicsofthedynamicstructureofwhitenoise.

• Explainhowalagoperatorworks.

• DescribeWold’stheorem.

• Defineagenerallinearprocess.

• RelaterationaldistributedlagstoWold’stheorem.

• Calculatethesamplemeanandsampleautocorrelation,anddescribetheBox-PierceQ-statisticandtheLjung-BoxQ-statistic.

• Describesamplepartialautocorrelation.

• NEW:Calculate,distinguish,andconvertbetweensimpleandcontinuouslycompoundedreturns.

• Defineanddistinguishbetweenvolatility,variancerate,andimpliedvolatility.

• NEW:Describehowthefirsttwomomentsmaybeinsufficienttodescribenon-normaldistributions.

• NEW:ExplainhowtheJarque-Beratestisusedtodeterminewhetherreturnsarenormallydistributed.

• NEW:Describethepowerlawanditsusefornon-normaldistributions.

• Definecorrelationandcovarianceanddifferentiatebetweencorrelationanddependence.

• NEW:Describepropertiesofcorrelationsbetweennormallydistributedvariableswhenusingaone-factormodel.

!

!

!

!

!

2019 2020

Chris Brooks, Introductory Econometrics for Finance, 3rd Edition

(Cambridge, UK: Cambridge University Press, 2014). Chapter 3.


Chapter 8. Modeling Cycles: MA, AR, and ARMA Models

QA-13 QA-13

• Describethepropertiesofthefirst-ordermovingaverage(MA(1))process,anddistinguishbetweenautoregressiverepresentationandmovingaveragerepresentation.

• Describethepropertiesofageneralfinite-orderprocessoforderq(MA(q))process.

• Describethepropertiesofthefirst-orderautoregressive(AR(1))process,anddefineandexplaintheYule-Walkerequation.

• Describethepropertiesofageneralpthorderautoregressive(AR(p))process.

• Defineanddescribethepropertiesoftheautoregressivemovingaverage(ARMA)process.

• DescribetheapplicationofARandARMAprocesses.

• DescribethebasicstepstoconductaMonteCarlosimulation.

• DescribewaystoreduceMonteCarlosamplingerror.

• NEW:ExplaintheuseofantitheticandcontrolvariatesinreducingMonteCarlosamplingerror.

• NEW:DescribethebootstrappingmethodanditsadvantageoverMonteCarlosimulation.

• Describepseudo-randomnumbergenerationandhowagoodsimulationdesignalleviatestheeffectsthechoiceoftheseedhasonthepropertiesofthegeneratedseries.

• Describesituationswherethebootstrappingmethodisineffective.

• Describethedisadvantagesofthesimulationapproachtofinancialproblemsolving.

!

!

2019 2020

John C. Hull, Risk Management and Financial Institutions, 4th edition

(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 2. Banks



FMP-1 FMP-1

• Identifythemajorrisksfacedbyabank.

• Evaluatethecapitalrequirementsforbanks.

• Distinguishbetweeneconomiccapitalandregulatorycapital.

• Explainhowdepositinsurancegivesrisetoamoralhazardproblem.

• Describeinvestmentbankingfinancingarrangementsincludingprivateplacement,publicoffering,bestefforts,firmcommitment,andDutchauctionapproaches.

• Describethepotentialconflictsofinterestamongcommercialbanking,securitiesservices,andinvestmentbankingdivisionsofabankandrecommendsolutionstotheconflictofinterestproblems.”

• Describethedistinctionsbetweenthe“bankingbook”andthe“tradingbook”ofabank.

• Explaintheoriginate-to-distributemodelofabankanddiscussitsbenefitsanddrawbacks.

• NEW:Identifythemajorrisksfacedbyabank,andexplainwaysinwhichtheseriskscanarise.

• Distinguishbetweeneconomiccapitalandregulatorycapital.

• NEW:SummarizeBaselCommitteeregulationsforregulatorycapitalandtheirmotivations.

• Explainhowdepositinsurancegivesrisetoamoralhazardproblem.

• NEW:Describeinvestmentbankingfinancingarrangementsincludingprivateplacement,publicoffering,bestefforts,firmcommitment,andDutchauctionapproaches.

• NEW:Describethepotentialconflictsofinterestamongcommercialbanking,securitiesservices,andinvestmentbankingdivisionsofabankandrecommendsolutionstotheconflictofinterestproblems.

• Describethedistinctionsbetweenthe“bankingbook”andthe“tradingbook”ofabank.

• Explaintheoriginate-to-distributemodelofabankanddiscussitsbenefitsanddrawbacks.

!

!

!

!

2019 2020


(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 3. Insurance Companies and Pension Plans



FMP-2 FMP-2

• Describethekeyfeaturesofthevariouscategoriesofinsurancecompaniesandidentifytherisksfacinginsurancecompanies.

• Describetheuseofmortalitytableandcalculatepremiumpaymentforapolicyholder.

• Calculateandinterpretlossratio,expenseratio,combinedratio,andoperatingratioforaproperty-casualtyinsurancecompany.

• Describemoralhazardandadverseselectionrisksfacinginsurancecompanies,provideexamplesofeach,anddescribehowtoovercometheproblems.

• Distinguishbetweenmortalityriskandlongevityriskanddescribehowtohedgetheserisks.

• Evaluatethecapitalrequirementsforlifeinsuranceandproperty-casualtyinsurancecompanies.

• Comparetheguarantysystemandtheregulatoryrequirementsforinsurancecompanieswiththoseforbanks.

• Describeadefinedbenefitplanandadefinedcontributionplanforapensionfundandexplainthedifferencesbetweenthem.

• Describethekeyfeaturesofthevariouscategoriesofinsurancecompaniesandidentifytherisksfacinginsurancecompanies.

• Describetheuseofmortalitytablesandcalculatethepremiumpaymentforapolicyholder.

• Distinguishbetweenmortalityriskandlongevityriskanddescribehowtohedgetheserisks

• Describeadefinedbenefitplanandadefinedcontributionplanforapensionfundandexplainthedifferencesbetweenthem.

• NEW:Calculateandinterpretlossratio,expenseratio,combinedratio,andoperatingratioforaproperty-casualtyinsurancecompany.

• NEW:Describemoralhazardandadverseselectionrisksfacinginsurancecompanies,provideexamplesofeach,anddescribehowtoovercometheproblems.

• Evaluatethecapitalrequirementsforlifeinsuranceandproperty-casualtyinsurancecompanies.

• Comparetheguarantysystemandtheregulatoryrequirementsforinsurancecompanieswiththoseforbanks.

!

!

2019 2020


(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 4. Mutual Funds and Hedge Funds


(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 4. Mutual Funds and Hedge Funds

FMP-3 FMP-3

• Differentiateamongopen-endmutualfunds,closed-endmutualfunds,andexchange-tradedfunds(ETFs).

• Calculatethenetassetvalue(NAV)ofanopen-endmutualfund.

• Distinguishbetweenactiveandpassivemanagementanddefinealpha.

• Explainthekeydifferencesbetweenhedgefundsandmutualfunds.

• Calculatethereturnonahedgefundinvestmentandexplaintheincentivefeestructureofahedgefundincludingthetermshurdlerate,high-watermark,andclawback.

• Describevarioushedgefundstrategies,includinglong/shortequity,dedicatedshort,distressedsecurities,mergerarbitrage,convertiblearbitrage,fixedincomearbitrage,emergingmarkets,globalmacro,andmanagedfutures,andidentifytherisksfacedbyhedgefunds.

• Describehedgefundperformanceandexplaintheeffectofmeasurementbiasesonperformancemeasurement.

• Differentiateamongopen-endmutualfunds,closed-endmutualfunds,andexchange-tradedfunds(ETFs).

• NEW:Identifyanddescribepotentialundesirabletradingbehaviorsatmutualfunds.

• Calculatethenetassetvalue(NAV)ofanopen-endmutualfund.

• Explainthekeydifferencesbetweenhedgefundsandmutualfunds.

• Calculatethereturnonahedgefundinvestmentandexplaintheincentivefeestructureofahedgefundincludingthetermshurdlerate,high-watermark,andclawback.

• Describevarioushedgefundstrategies,includinglong/shortequity,dedicatedshort,distressedsecurities,mergerarbitrage,convertiblearbitrage,fixedincomearbitrage,emergingmarkets,globalmacro,andmanagedfutures,andidentifytherisksfacedbyhedgefunds.

• NEW:Describecharacteristicsofmutualfundandhedgefundperformanceandexplaintheeffectofmeasurementbiasesonperformancemeasurement.

!

!

2019 2020

John C. Hull, Options, Futures, and Other Derivatives, 10th Edition

(New York: Pearson, 2017). Chapter 1. Introduction


(New York: Pearson, 2017). Chapter 1. Introduction

FMP-4 FMP-4

• NEW:Definederivatives,describefeaturesandusesofderivatives,andcomparelinearandnon-linearderivatives.

• NEW:Describetheover-the-countermarket,distinguishitfromtradingonanexchange,andevaluateitsadvantagesanddisadvantages.

• Differentiatebetweenoptions,forwards,andfuturescontracts.

• Identifyandcalculateoptionandforwardcontractpayoffs.

• Differentiateamongthebroadcategoriesoftraders:hedgers,speculators,andarbitrageurs.

• Calculateandcomparethepayoffsfromhedgingstrategiesinvolvingforwardcontractsandoptions.

• Calculateandcomparethepayoffsfromspeculativestrategiesinvolvingfuturesandoptions.

• Calculateanarbitragepayoffanddescribehowarbitrageopportunitiesaretemporary.

• Describesomeoftherisksthatcanarisefromtheuseofderivatives.

• Describetheover-the-countermarket,distinguishitfromtradingonanexchange,andevaluateitsadvantagesanddisadvantages.

• Differentiatebetweenoptions,forwards,andfuturescontracts.

• Identifyandcalculateoptionandforwardcontractpayoffs.

• Calculateandcomparethepayoffsfromhedgingstrategiesinvolvingforwardcontractsandoptions.

• Calculateandcomparethepayoffsfromspeculativestrategiesinvolvingfuturesandoptions.

• Calculateanarbitragepayoffanddescribehowarbitrageopportunitiesaretemporary.

• Describesomeoftherisksthatcanarisefromtheuseofderivatives.

• Differentiateamongthebroadcategoriesoftraders:hedgers,speculators,andarbitrageurs.

!

!

2019 2020

!!

!

!

!

!

Jon Gregory, Central Counterparties: Mandatory Clearing and Bilateral Margin Requirements for OTC Derivatives

(West Sussex, UK: John Wiley & Sons, 2014). Chapter 2. Exchanges, OTC Derivatives, DPCs and SPVs

John Hull, Options, Futures, and Other Derivatives, 9th Edition

(New York: Pearson, 2014). Chapter 2. Mechanics of Futures Markets

FMP-5 FMP-5

• Describehowexchangescanbeusedtoalleviatecounterpartyrisk.

• Explainthedevelopmentsinclearingthatreducerisk.

• NEW:Describenettinganddescribeanettingprocess.

• NEW:Describetheimplementationofamarginingprocessandexplainthedeterminantsofinitialandvariationmarginrequirements.

• NEW:Compareexchange-tradedandOTCmarketsanddescribetheiruses.

• NEW:Identifytheclassesofderivativesecuritiesandexplaintheriskassociatedwiththem.

• IdentifyrisksassociatedwithOTCmarketsandexplainhowtheseriskscanbemitigated.

• NEW:Describetheroleofcollateralizationintheover-the-countermarketandcompareittothemarginingsystem.

• NEW:Explaintheuseofspecialpurposevehicles(SPVs)intheOTCderivativesmarket.

• Defineanddescribethekeyfeaturesofafuturescontract,includingtheasset,thecontractpriceandsize,delivery,andlimits.

• Explaintheconvergenceoffuturesandspotprices.

• Describetherationaleformarginrequirementsandexplainhowtheywork.

• Describetheroleofaclearinghouseinfuturesandover-the-countermarkettransactions.

• Describetheroleofcentralcounterparties(CCPs)anddistinguishbetweenbilateralandcentralizedclearing.

• Describetheroleofcollateralizationintheover-the-countermarketandcompareittothemarginingsystem.

• Identifythedifferencesbetweenanormalandinvertedfuturesmarket.

• Describethemechanicsofthedeliveryprocessandcontrastitwithcashsettlement.

• Explainthedifferentmarketquotes.

• Evaluatetheimpactofdifferenttradingordertypes.

• Compareandcontrastforwardandfuturescontracts.

2019 2020


(West Sussex, UK: John Wiley & Sons, 2014). Chapter 3. Basic Principles of Central Clearing

Chapter 14. Risks Caused by CCPs: Risks Faced by CCPs


(New York: Pearson, 2017). Chapter 4. Interest Rates

FMP-6 FMP-6

• Defineanddifferentiatebetweenshortandlonghedgesandidentifytheirappropriateuses.

• Describetheargumentsforandagainsthedgingandthepotentialimpactofhedgingonfirmprofitability.

• Definethebasisandexplainthevarioussourcesofbasisrisk,andexplainhowbasisrisksarisewhenhedgingwithfutures.

• Definecrosshedging,andcomputeandinterprettheminimumvariancehedgeratioandhedgeeffectiveness.

• Computetheoptimalnumberoffuturescontractsneededtohedgeanexposure,andexplainandcalculatethe“tailingthehedge”adjustment.

• Explainhowtousestockindexfuturescontractstochangeastockportfolio’sbeta.

• Explaintheterm“rollingthehedgeforward”anddescribesomeoftherisksthatarisefromthisstrategy.

• Provideexamplesofthemechanicsofacentralcounterparty(CCP).

• NEW:DescribetheroleofCCPsanddistinguishbetweenbilateralandcentralizedclearing.

• DescribeadvantagesanddisadvantagesofcentralclearingofOTCderivatives.

• NEW:ExplainregulatoryinitiativesfortheOTCderivativesmarketandtheirimpactoncentralclearing.

• Comparemarginrequirementsincentrallyclearedandbilateralmarkets,andexplainhowmargincanmitigaterisk.

• Compareandcontrastbilateralmarketstotheuseofnovationandnetting.

• Assesstheimpactofcentralclearingonthebroaderfinancialmarkets.

• IdentifyandexplainthetypesofrisksfacedbyCCPs.

• NEW:Identifyanddistinguishbetweentheriskstoclearingmembersaswellasnon-members.

!

!

!

2019 2020





FMP-7 FMP-7

• DescribeTreasuryrates,LIBOR,andreporates,andexplainwhatismeantbythe“risk-free”rate.

• Calculatethevalueofaninvestmentusingdifferentcompoundingfrequencies.

• Convertinterestratesbasedondifferentcompoundingfrequencies.

• Calculatethetheoreticalpriceofabondusingspotrates.

• Deriveforwardinterestratesfromasetofspotrates.

• Derivethevalueofthecashflowsfromaforwardrateagreement(FRA).

• Calculatetheduration,modifieddurationanddollardurationofabond.

• Evaluatethelimitationsofdurationandexplainhowconvexityaddressessomeofthem.

• Calculatethechangeinabond’spricegivenitsduration,itsconvexity,andachangeininterestrates.

• Compareandcontrastthemajortheoriesofthetermstructureofinterestrates.

• NEW:Defineanddescribethekeyfeaturesofafuturescontract,includingtheunderlyingasset,thecontractpriceandsize,tradingvolume,openinterest,delivery,andlimits.

• Explaintheconvergenceoffuturesandspotprices.

• Describetherationaleformarginrequirementsandexplainhowtheywork.

• NEW:Describetheroleofanexchangeinfuturesandover-the-countermarkettransactions.

• Identifythedifferencesbetweenanormalandinvertedfuturesmarket.

• Explainthedifferentmarketquotes.

• Describethemechanicsofthedeliveryprocessandcontrastitwithcashsettlement.

• Evaluatetheimpactofdifferenttradingordertypes.

• NEW:Describetheapplicationofmarkingtomarketandhedgeaccountingforfutures.

• Compareandcontrastforwardandfuturescontracts.

!

!

!

2019 2020




(New York: Pearson, 2017). Chapter 5. Determination of Forward and Futures Prices

FMP-8 FMP-8

• Differentiatebetweeninvestmentandconsumptionassets.• Defineshort-sellingandcalculatethenetprofitofashortsaleofa

dividend-payingstock.• Describethedifferencesbetweenforwardandfuturescontractsand

explaintherelationshipbetweenforwardandspotprices.• Calculatetheforwardpricegiventheunderlyingasset’sspotprice,

anddescribeanarbitrageargumentbetweenspotandforwardprices.

• Explaintherelationshipbetweenforwardandfuturesprices.• Calculateaforwardforeignexchangerateusingtheinterestrate

parityrelationship.• Defineincome,storagecosts,andconvenienceyield.• Calculatethefuturespriceoncommoditiesincorporatingincome/

storagecostsand/orconvenienceyields.• Calculate,usingthecost-of-carrymodel,forwardpriceswherethe

underlyingasseteitherdoesordoesnothaveinterimcashflows.• Describethevariousdeliveryoptionsavailableinthefuturesmarkets

andhowtheycaninfluencefuturesprices.• Explaintherelationshipbetweencurrentfuturespricesand

expectedfuturespotprices,includingtheimpactofsystematicandnonsystematicrisk.

• Defineandinterpretcontangoandbackwardation,andexplainhowtheyrelatetothecost-of-carrymodel.

• Defineanddifferentiatebetweenshortandlonghedgesandidentifytheirappropriateuses.

• Describetheargumentsforandagainsthedgingandthepotentialimpactofhedgingonfirmprofitability.

• Definethebasisandexplainthevarioussourcesofbasisrisk,andexplainhowbasisrisksarisewhenhedgingwithfutures.

• Definecrosshedging,andcomputeandinterprettheminimumvariancehedgeratioandhedgeeffectiveness.

• Computetheoptimalnumberoffuturescontractsneededtohedgeanexposure,andexplainandcalculatethe“tailingthehedge”adjustment.

• Explainhowtousestockindexfuturescontractstochangeastockportfolio’sbeta.

• NEW:Explainhowtocreatealong-termhedgeusinga“stackandroll”strategyanddescribesomeoftherisksthatarisefromthisstrategy.

!

2019 2020

Anthony Saunders and Marcia Millon Cornett, Financial Institutions Management:

A Risk Management Approach, 8th Edition (New York: McGraw-Hill, 2014).

Chapter 13. Foreign Exchange Risk


(New York: Pearson, 2017). Chapter 6. Interest Rate Futures

FMP-9 FMP-9

• Identifythemostcommonlyuseddaycountconventions,describethemarketsthateachoneistypicallyusedin,andapplyeachtoaninterestcalculation.

• CalculatetheconversionofadiscountratetoapriceforaUSTreasurybill.

• DifferentiatebetweenthecleananddirtypriceforaUSTreasurybond;calculatetheaccruedinterestanddirtypriceonaUSTreasurybond.

• ExplainandcalculateaUSTreasurybondfuturescontractconversionfactor.

• CalculatethecostofdeliveringabondintoaTreasurybondfuturescontract.

• Describetheimpactofthelevelandshapeoftheyieldcurveonthecheapest-to-deliverTreasurybonddecision.

• CalculatethetheoreticalfuturespriceforaTreasurybondfuturescontract.

• CalculatethefinalcontractpriceonaEurodollarfuturescontract.

• DescribeandcomputetheEurodollarfuturescontractconvexityadjustment.

• ExplainhowEurodollarfuturescanbeusedtoextendtheLIBORzerocurve.

• Calculatetheduration-basedhedgeratioandcreateaduration-basedhedgingstrategyusinginterestratefutures.

• Explainthelimitationsofusingaduration-basedhedgingstrategy.

• NEW:Explainanddescribethemechanicsofspotquotes,forwardquotes,andfuturesquotesintheforeignexchangemarkets,anddistinguishbetweenbidandaskexchangerates.

• NEW:Calculatebid-askspreadandexplainwhythebid-askspreadforspotquotesmaybedifferentfromthebid-askspreadforforwardquotes.

• NEW:Compareoutright(forward)andswaptransactions.

• NEW:Define,compare,andcontrasttransactionrisk,translationrisk,andeconomicrisk.

• NEW:Describeexamplesoftransaction,translation,andeconomicrisks,andexplainhowtohedgetheserisks.

• NEW:Describetherationaleformulti-currencyhedgingusingoptions.

• NEW:Identifyandexplainthefactorsthatdetermineexchangerates.

• Calculateandexplaintheeffectofanappreciation/depreciationofacurrencyrelativetoaforeigncurrency.

• Explainthepurchasingpowerparitytheoremandusethistheoremtocalculatetheappreciationordepreciationofaforeigncurrency.

• Describetherelationshipbetweennominalandrealinterestrates.

• Describehowanon-arbitrageassumptionintheforeignexchangemarketsleadstotheinterestrateparitytheorem,andusethistheoremtocalculateforwardforeignexchangerates.

• NEW:Distinguishbetweencoveredanduncoveredinterestrateparityconditions.

!

!

!

!

!

!

!

!

2019 2020

New Edition: John C. Hull, Options, Futures, and Other Derivatives, 10th Edition

(New York: Pearson, 2017). Chapter 5. Determination of Forward and Futures Prices


(New York: Pearson, 2017). Chapter 7. Swaps

FMP-10 FMP-10

• Explainthemechanicsofaplainvanillainterestrateswapandcomputeitscashflows.

• Explainhowaplainvanillainterestrateswapcanbeusedtotransformanassetoraliabilityandcalculatetheresultingcashflows.

• Explaintheroleoffinancialintermediariesintheswapsmarket.• Describetheroleoftheconfirmationinaswaptransaction.• Describethecomparativeadvantageargumentfortheexistence

ofinterestrateswapsandevaluatesomeofthecriticismsofthisargument.

• Explainhowthediscountratesinaplainvanillainterestrateswaparecomputed.

• Calculatethevalueofaplainvanillainterestrateswapbasedontwosimultaneousbondpositions.

• Calculatethevalueofaplainvanillainterestrateswapfromasequenceofforwardrateagreements(FRAs).

• Explainthemechanicsofacurrencyswapandcomputeitscashflows.

• Explainhowacurrencyswapcanbeusedtotransformanassetorliabilityandcalculatetheresultingcashflows.

• Calculatethevalueofacurrencyswapbasedontwosimultaneousbondpositions.

• CalculatethevalueofacurrencyswapbasedonasequenceofFRAs.• Describethecreditriskexposureinaswapposition.• Identifyanddescribeothertypesofswaps,includingcommodity,

volatilityandexoticswaps.

• Differentiatebetweeninvestmentandconsumptionassets.• NEW:Defineshort-sellingandcalculatethenetprofitofashortsale

ofadividend-payingstock.• Describethedifferencesbetweenforwardandfuturescontractsand

explaintherelationshipbetweenforwardandspotprices.• Calculatetheforwardpricegiventheunderlyingasset’sspotprice,

anddescribeanarbitrageargumentbetweenspotandforwardprices.

• NEW:Distinguishbetweentheforwardpriceandthevalueofaforwardcontract.

• NEW:Calculatethevalueofaforwardcontractonafinancialassetthatdoesordoesnotprovideincomeoryield.

• Explaintherelationshipbetweenforwardandfuturesprices.• Calculateaforwardforeignexchangerateusingtheinterestrate

parityrelationship.• NEW:Calculatethevalueofastockindexfuturescontractand

explaintheconceptofindexarbitrage.

!

!

!

!

2019 2020

Robert McDonald, Derivatives Markets, 3rd Ed. Chapter 6. Commodity Forwards and Futures

John C. Hull, Options, Futures, and Other Derivatives, 10th Ed.Chapter 5. Determination of Forward and Futures Prices


(New York: Pearson, 2017). Chapter 10. Mechanics of Options Markets

FMP-11 FMP-11

• Describethetypes,positionvariations,andtypicalunderlyingassetsofoptions.

• Explainthespecificationofexchange-tradedstockoptioncontracts,includingthatofnonstandardproducts.

• Describehowtrading,commissions,marginrequirements,andexercisetypicallyworkforexchange-tradedoptions.

• NEW:Explainthekeydifferencesbetweencommoditiesandfinancialassets.

• NEW:Defineandapplycommodityconceptssuchasstoragecosts,carrymarkets,leaserate,andconvenienceyield.

• NEW:Identifyfactorsthatimpactpricesonagriculturalcommodities,metals,energy,andweatherderivatives.

• Explainthebasicequilibriumformulaforpricingcommodityforwards.

• Describeanarbitragetransactionincommodityforwards,andcomputethepotentialarbitrageprofit.

• NEW:Definetheleaserateandexplainhowitdeterminestheno-arbitragevaluesforcommodityforwardsandfutures.

• NEW:Describethecostofcarrymodelandillustratetheimpactofstoragecostsandconvenienceyieldsoncommodityforwardpricesandno-arbitragebounds.

• Computetheforwardpriceofacommoditywithstoragecosts.

• Comparetheleaseratewiththeconvenienceyield.

• Explainhowtocreateasyntheticcommodityposition,anduseittoexplaintherelationshipbetweentheforwardpriceandtheexpectedfuturespotprice.

• Explaintherelationshipbetweencurrentfuturespricesandexpectedfuturespotprices,includingtheimpactofsystematicandnonsystematicrisk.

• NEW:Defineandinterpretnormalbackwardationandcontango.

!

!

!

!

!

!

2019 2020


(New York: Pearson, 2017). Chapter 11. Properties of Stock Options


(New York: Pearson, 2017). Chapter 11. Properties of Stock Options

FMP-12 FMP-12

• Identifythesixfactorsthataffectanoption’spriceanddescribehowthesesixfactorsaffectthepriceforbothEuropeanandAmericanoptions.

• Identifyandcomputeupperandlowerboundsforoptionpricesonnon-dividendanddividendpayingstocks.

• Explainput-callparityandapplyittothevaluationofEuropeanandAmericanstockoptions.

• ExplaintheearlyexercisefeaturesofAmericancallandputoptions.

• NEW:Describethetypes,positionvariations,payoffsandprofits,andtypicalunderlyingassetsofoptions.

• NEW:Explainthespecificationofexchange-tradedstockoptioncontracts,includingthatofnonstandardproducts.

• NEW:Explainhowdividendsandstocksplitscanimpactthetermsofastockoption.

• NEW:Describehowtrading,commissions,marginrequirements,andexercisetypicallyworkforexchange-tradedoptions.

• NEW:Defineanddescribewarrants,convertiblebonds,andemployeestockoptions.

!

!

!

!

!

2019 2020


(New York: Pearson, 2017). Chapter 12. Trading Strategies Involving Options



FMP-13 FMP-13

• Explainthemotivationtoinitiateacoveredcalloraprotectiveputstrategy.

• Describetheuseandcalculatethepayoffsofvariousspreadstrategies.

• Describetheuseandexplainthepayofffunctionsofcombinationstrategies.

• NEW:Identifythesixfactorsthataffectanoption’sprice.

• NEW:Identifyandcomputeupperandlowerboundsforoptionpricesonnon-dividendanddividendpayingstocks.

• NEW:Explainput-callparityandapplyittothevaluationofEuropeanandAmericanstockoptions,withdividendsandwithoutdividends,andexpressitintermsofforwardprices.

• NEW:ExplainandassesspotentialrationalesforusingtheearlyexercisefeaturesofAmericancallandputoptions.

!!

!

!

2019 2020




(New York: Pearson, 2017). Chapter 26. Exotic Options

FMP-14 FMP-14

• Defineandcontrastexoticderivativesandplainvanilladerivatives.

• Describesomeofthefactorsthatdrivethedevelopmentofexoticproducts.

• Explainhowanyderivativecanbeconvertedintoazero-costproduct.

• DescribehowstandardAmericanoptionscanbetransformedintononstandardAmericanoptions.

• Identifyanddescribethecharacteristicsandpay-offstructureofthefollowingexoticoptions:gap,forwardstart,compound,chooser,barrier,binary,lookback,shout,Asian,exchange,rainbow,andbasketoptions.

• Describeandcontrastvolatilityandvarianceswaps.

• Explainthebasicpremiseofstaticoptionreplicationandhowitcanbeappliedtohedgingexoticoptions.

• Explainthemotivationtoinitiateacoveredcalloraprotectiveputstrategy.

• NEW:Describeprincipalprotectednotes(PPNs)andexplainnecessaryconditionstocreateaPPN.

• Describetheuseandcalculatethepayoffsofvariousspreadstrategies.

• Describetheuseandexplainthepayofffunctionsofcombinationstrategies.

!

2019 2020


(New York: Pearson, 2017). Chapter 26. Exotic Options

Robert McDonald, Derivatives Markets, 3rd Edition (Boston: Addison-Wesley, 2013)

Chapter 6. Commodity Forwards and Futures

FMP-15 FMP-15

• Applycommodityconceptssuchasstoragecosts,carrymarkets,leaserate,andconvenienceyield.

• Explainthebasicequilibriumformulaforpricingcommodityforwards.

• Describeanarbitragetransactionincommodityforwards,andcomputethepotentialarbitrageprofit.

• Definetheleaserateandexplainhowitdeterminestheno-arbitragevaluesforcommodityforwardsandfutures.

• Definecarrymarkets,andillustratetheimpactofstoragecostsandconvenienceyieldsoncommodityforwardpricesandno-arbitragebounds.

• Computetheforwardpriceofacommoditywithstoragecosts.

• Comparetheleaseratewiththeconvenienceyield.

• Identifyfactorsthatimpactgold,corn,electricity,naturalgas,andoilforwardprices.

• Computeacommodityspread.

• Explainhowbasisriskcanoccurwhenhedgingcommoditypriceexposure.

• Evaluatethedifferencesbetweenastriphedgeandastackhedgeandexplainhowthesedifferencesimpactriskmanagement.

• Provideexamplesofcross-hedging,specificallytheprocessofhedgingjetfuelwithcrudeoilandusingweatherderivatives.

• Explainhowtocreateasyntheticcommodityposition,anduseittoexplaintherelationshipbetweentheforwardpriceandtheexpectedfuturespotprice.

• Defineandcontrastexoticderivativesandplainvanilladerivatives.

• NEW:Describesomeofthefactorsthatdrivethedevelopmentofexoticderivativeproducts.

• NEW:Explainhowanyderivativecanbeconvertedintoazero-costproduct.

• DescribehowstandardAmericanoptionscanbetransformedintononstandardAmericanoptions.

• Identifyanddescribethecharacteristicsandpay-offstructureofthefollowingexoticoptions:gap,forwardstart,compound,chooser,barrier,binary,lookback,Asian,exchange,andbasketoptions.

• Describeandcontrastvolatilityandvarianceswaps.

• Explainthebasicpremiseofstaticoptionreplicationandhowitcanbeappliedtohedgingexoticoptions.

!

!

2019 2020




(West Sussex, UK: John Wiley & Sons, 2014). Chapter 2. Exchanges, OTC Derivatives, DPCs and SPVs

FMP-16 FMP-16

• Describehowexchangescanbeusedtoalleviatecounterpartyrisk.• Explainthedevelopmentsinclearingthatreducerisk.• Compareexchange-tradedandOTCmarketsanddescribetheiruses.• Identifytheclassesofderivativessecuritiesandexplaintherisk

associatedwiththem.• IdentifyrisksassociatedwithOTCmarketsandexplainhowthese

riskscanbemitigated.

• NEW:DescribeTreasuryrates,LIBOR,SecuredOvernightFinancingRate(SOFR),andreporatesandexplainwhatismeantbythe“risk-free”rate.

• Calculatethevalueofaninvestmentusingdifferentcompoundingfrequencies.

• Convertinterestratesbasedondifferentcompoundingfrequencies.

• Calculatethetheoreticalpriceofabondusingspotrates.

• NEW:Calculatetheduration,modifiedduration,anddollardurationofabond.

• Evaluatethelimitationsofdurationandexplainhowconvexityaddressessomeofthem.

• Calculatethechangeinabond’spricegivenitsduration,itsconvexity,andachangeininterestrates.

• Deriveforwardinterestratesfromasetofspotrates.

• Derivethevalueofthecashflowsfromaforwardrateagreement(FRA).

• NEW:Calculatezero-couponratesusingthebootstrapmethod.

• NEW:Compareandcontrastthemajortheoriesofthetermstructureofinterestrates.

!

!

!!

2019 2020

Frank Fabozzi (editor), Steve Mann, and Adam Cohen, The Handbook of Fixed Income Securities, 8th Edition

(New York: McGraw-Hill, 2012). Chapter 12. Corporate Bonds


(West Sussex, UK: John Wiley & Sons, 2014). Chapter 3. Basic Principles of Central Clearing

FMP-17 FMP-17

• Provideexamplesofthemechanicsofacentralcounterparty(CCP).• DescribeadvantagesanddisadvantagesofcentralclearingofOTC

derivatives.• Comparemarginrequirementsincentrallyclearedandbilateral

markets,andexplainhowmargincanmitigaterisk.• Compareandcontrastbilateralmarketstotheuseofnovationand

netting.• Assesstheimpactofcentralclearingonthebroaderfinancial

markets.

• NEW:Describefeaturesofbondtrading,andexplainthebehaviorofbondyield.

• Describeabondindentureandexplaintheroleofthecorporatetrusteeinabondindenture.

• NEW:Definehigh-yieldbonds,anddescribetypesofhigh-yieldbondissuersandsomeofthepaymentfeaturesuniquetohighyieldbonds.

• Differentiatebetweencreditdefaultriskandcreditspreadrisk.

• Describeeventriskandexplainwhatmaycauseitincorporatebonds.

• NEW:Describethedifferentclassificationsofbondscharacterizedbyissuer,maturity,interestrate,andcollateral.

• Describethemechanismsbywhichcorporatebondscanberetiredbeforematurity.

• NEW:Definerecoveryrateanddefaultrate,differentiatebetweenanissuedefaultrateandadollardefaultrate,anddescribetherelationshipbetweenrecoveryratesandseniority.

• Evaluatetheexpectedreturnfromabondinvestmentandidentifythecomponentsofthebond’sexpectedreturn.

!

!

!

!

2019 2020

Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Today’s Markets, 3rd Edition

(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 20. Mortgages and Mortgage-Backed Securities


(West Sussex, UK: John Wiley & Sons, 2014). Chapter 14 (section 14.4 only).

Risks Caused by CCPs: Risks Faced by CCPs

FMP-18 FMP-18

• IdentifyandexplainthetypesofrisksfacedbyCCPs.

• Identifyanddistinguishbetweentheriskstoclearingmembersaswellasnon-members.

• IdentifyandevaluatelessonslearnedfrompriorCCPfailures.

• Describethevarioustypesofresidentialmortgageproducts.

• Calculateafixedratemortgagepayment,anditsprincipalandinterestcomponents.

• Describethemortgageprepaymentoptionandthefactorsthatinfluenceprepayments.

• NEW:Summarizethesecuritizationprocessofmortgagebackedsecurities(MBS),particularlyformationofmortgagepoolsincludingspecificpoolsandto-be-announceds(TBAs).

• NEW:Calculateweightedaveragecoupon,weightedaveragematurity,singlemonthlymortalityrate(SMM),andconditionalprepaymentrate(CPR)foramortgagepool.

• NEW:Describetheprocessoftradingofpass-throughagencyMBS.

• NEW:ExplainthemechanicsofdifferenttypesofagencyMBSproducts,includingcollateralizedmortgageobligations(CMOs),interest-onlysecurities(IOs),andprincipal-onlysecurities(POs).

• Describeadollarrolltransactionandhowtovalueadollarroll.

• Explainprepaymentmodelinganditsfourcomponents:refinancing,turnover,defaults,andcurtailments.

• DescribethestepsinvaluinganMBSusingMonteCarlosimulation.

• DefineOptionAdjustedSpread(OAS),andexplainitschallengesanditsuses.

!

!

!!

2019 2020


(New York: Pearson, 2017). Chapter 6. Interest Rate Futures

Anthony Saunders and Marcia Millon Cornett, Financial Institutions Management:

A Risk Management Approach, 8th Edition (New York: McGraw-Hill, 2014).

Chapter 13. Foreign Exchange Risk

FMP-19FMP-19

• Identifythemostcommonlyuseddaycountconventions,describethemarketsthateachoneistypicallyusedin,andapplyeachtoaninterestcalculation.

• CalculatetheconversionofadiscountratetoapriceforaUSTreasurybill.

• DifferentiatebetweenthecleananddirtypriceforaUSTreasurybond;calculatetheaccruedinterestanddirtypriceonaUSTreasurybond.

• ExplainandcalculateaUSTreasurybondfuturescontractconversionfactor.

• CalculatethecostofdeliveringabondintoaTreasurybondfuturescontract.

• NEW:Describetheimpactofthelevelandshapeoftheyieldcurveonthecheapest-to-deliverTreasurybonddecision.

• CalculatethetheoreticalfuturespriceforaTreasurybondfuturescontract.

• NEW:CalculatethefinalcontractpriceonaEurodollarfuturescontract,andcompareEurodollarfuturestoFRAs.

• DescribeandcomputetheEurodollarfuturescontractconvexityadjustment.

• ExplainhowEurodollarfuturescanbeusedtoextendtheLIBORzerocurve.

• NEW:Calculatetheduration-basedhedgeratioandcreateaduration-basedhedgingstrategyusinginterestratefutures.

• NEW:Explainthelimitationsofusingaduration-basedhedgingstrategy.

• Calculateafinancialinstitution’soverallforeignexchangeexposure.

• Explainhowafinancialinstitutioncouldalteritsnetpositionexposuretoreduceforeignexchangerisk.

• Calculateandexplaintheeffectofanappreciation/depreciationofacurrencyrelativetoaforeigncurrency.

• Calculateafinancialinstitution’spotentialdollargainorlossexposuretoaparticularcurrency.

• Identifyanddescribethedifferenttypesofforeignexchangetradingactivities.

• Identifythesourcesofforeignexchangetradinggainsandlosses.

• Calculatethepotentialgainorlossfromaforeigncurrencydenominatedinvestment.

• Explainbalance-sheethedgingwithforwards.

• Describehowanon-arbitrageassumptionintheforeignexchangemarketsleadstotheinterestrateparitytheorem,andusethistheoremtocalculateforwardforeignexchangerates.

• Explainthepurchasingpowerparitytheoremandusethistheoremtocalculatetheappreciationordepreciationofaforeigncurrency.

• Explainwhydiversificationinmulticurrencyasset-liabilitypositionscouldreduceportfoliorisk.

• Describetherelationshipbetweennominalandrealinterestrates.

!

!

!

!

2019 2020


(New York: Pearson, 2017). Chapter 7. Swaps

Frank Fabozzi (editor), Steve Mann, and Adam Cohen, The Handbook of Fixed Income Securities, 8th Edition

(New York: McGraw-Hill, 2012). Chapter 12. Corporate Bonds

FMP-20 FMP-20

• Describeabondindentureandexplaintheroleofthecorporatetrusteeinabondindenture.

• Explainabond’smaturitydateandhowitimpactsbondretirements.

• Describethemaintypesofinterestpaymentclassifications.

• Describezero-couponbondsandexplaintherelationshipbetweenoriginal-issuediscountandreinvestmentrisk.

• Distinguishamongthefollowingsecuritytypesrelevantforcorporatebonds:mortgagebonds,collateraltrustbonds,equipmenttrustcertificates,subordinatedandconvertibledebenturebonds,andguaranteedbonds.

• Describethemechanismsbywhichcorporatebondscanberetiredbeforematurity.

• Differentiatebetweencreditdefaultriskandcreditspreadrisk.

• Describeeventriskandexplainwhatmaycauseitincorporatebonds.

• Definehigh-yieldbonds,anddescribetypesofhigh-yieldbondissuersandsomeofthepaymentfeaturesuniquetohighyieldbonds.

• Defineanddifferentiatebetweenanissuerdefaultrateandadollardefaultrate.

• Definerecoveryratesanddescribetherelationshipbetweenrecoveryratesandseniority.

• Explainthemechanicsofaplainvanillainterestrateswapandcomputeitscashflows.

• Explainhowaplainvanillainterestrateswapcanbeusedtotransformanassetoraliabilityandcalculatetheresultingcashflows.

• Explaintheroleoffinancialintermediariesintheswapsmarket.

• Describetheroleoftheconfirmationinaswaptransaction.

• Describethecomparativeadvantageargumentfortheexistenceofinterestrateswapsandevaluatesomeofthecriticismsofthisargument.

• Explainhowthediscountratesinaplainvanillainterestrateswaparecomputed.

• Calculatethevalueofaplainvanillainterestrateswapbasedontwosimultaneousbondpositions.

• Calculatethevalueofaplainvanillainterestrateswapfromasequenceofforwardrateagreements(FRAs).

• Explainthemechanicsofacurrencyswapandcomputeitscashflows.

• Explainhowacurrencyswapcanbeusedtotransformanassetorliabilityandcalculatetheresultingcashflows.

• Calculatethevalueofacurrencyswapbasedontwosimultaneousbondpositions.

• NEW:Calculatethevalueofacurrencyswapbasedonasequenceofforwardexchangerates.

• NEW:Identifyanddescribeothertypesofswaps,includingcommodity,volatility,creditdefault,andexoticswaps.

• Describethecreditriskexposureinaswapposition.

!

!

2019 2020

Kevin Dowd, Measuring Market Risk, 2nd Edition

(West Sussex, England: John Wiley & Sons, 2005).Chapter 2. Measures of Financial Risk

Linda Allen, Jacob Boudoukh and Anthony Saunders, Understanding Market, Credit and Operational Risk:

The Value at Risk Approach (Oxford: Blackwell Publishing, 2004).

Chapter 2. Quantifying Volatility in VaR Models

VRM-1 VRM-1

• Explainhowassetreturndistributionstendtodeviatefromthenormaldistribution.

• Explainreasonsforfattailsinareturndistributionanddescribetheirimplications.

• Distinguishbetweenconditionalandunconditionaldistributions.

• Describetheimplicationsofregimeswitchingonquantifyingvolatility.

• EvaluatethevariousapproachesforestimatingVaR.

• Compareandcontrastdifferentparametricandnon-parametricapproachesforestimatingconditionalvolatility.

• Calculateconditionalvolatilityusingparametricandnon-parametricapproaches.

• Explaintheprocessofreturnaggregationinthecontextofvolatilityforecastingmethods.

• Evaluateimpliedvolatilityasapredictoroffuturevolatilityanditsshortcomings.

• Explainlonghorizonvolatility/VaRandtheprocessofmeanreversionaccordingtoanAR(1)model.

• Calculateconditionalvolatilitywithandwithoutmeanreversion.

• Describetheimpactofmeanreversiononlonghorizonconditionalvolatilityestimation

• NEW:Describethemean-varianceframeworkandtheefficientfrontier.

• NEW:Explainthelimitationsofthemean-varianceframeworkwithrespecttoassumptionsaboutreturndistributions.

• NEW:Comparethenormaldistributionwiththetypicaldistributionofreturnsofriskyfinancialassetssuchasequities.

• NEW:DefinetheVaRmeasureofrisk,describeassumptionsaboutreturndistributionsandholdingperiod,andexplainthelimitationsofVaR.

• ExplainandcalculateExpectedShortfall(ES),andcompareandcontrastVaRandES.

• Definethepropertiesofacoherentriskmeasureandexplainthemeaningofeachproperty.

• ExplainwhyVaRisnotacoherentriskmeasure.

• Describespectralriskmeasures,andexplainhowVaRandESarespecialcasesofspectralriskmeasures.

!

!

!

!

2019 2020



Chapter 3. Putting VaR to Work



Chapter 3. Putting VaR to Work

VRM-2 VRM-2

• Explainandgiveexamplesoflinearandnon-linearderivatives.

• DescribeandcalculateVaRforlinearderivatives.

• Describethedelta-normalapproachtocalculatingVaRfornon-linearderivatives.

• Describethelimitationsofthedelta-normalmethod.

• ExplainthefullrevaluationmethodforcomputingVaR.

• Comparedelta-normalandfullrevaluationapproachesforcomputingVaR.

• ExplainstructuredMonteCarlo,stresstestingandscenarioanalysismethodsforcomputingVaR.Identifyingstrengthsandweaknessesofeachapproach.

• Describetheimplicationsofcorrelationbreakdownforscenarioanalysis.

• Describeworst-casescenario(WCS)analysisandcompareWCStoVaR.

• NEW:Explainandgiveexamplesoflinearandnon-linearderivatives.

• DescribeandcalculateVaRforlinearderivatives.

• NEW:DescribeandexplainthehistoricalsimulationapproachforcomputingVaRandES.

• NEW:Describethedelta-normalapproachforcalculatingVaRfornon-linearderivatives.

• NEW:Describethelimitationsofthedelta-normalmethod.

• ExplainthefullrevaluationmethodforcomputingVaR.

• NEW:Comparedelta-normalandfullrevaluationapproachesforcomputingVaR.

• NEW:ExplainstructuredMonteCarloandstresstestingmethodsforcomputingVaR,andidentifystrengthsandweaknessesofeachapproach.

• Describetheimplicationsofcorrelationbreakdownforscenarioanalysis.

• NEW:Describeworst-casescenario(WCS)analysisandcompareWCStoVaR.

!

!

!

!

!

!

!

2019 2020





VRM-3 VRM-3

• Describethemean-varianceframeworkandtheefficientfrontier.

• Explainthelimitationsofthemean-varianceframeworkwithrespecttoassumptionsaboutthereturndistributions.

• DefinetheValue-at-Risk(VaR)measureofrisk,describeassumptionsaboutreturndistributionsandholdingperiod,andexplainthelimitationsofVaR.

• Definethepropertiesofacoherentriskmeasureandexplainthemeaningofeachproperty.

• ExplainwhyVaRisnotacoherentriskmeasure.

• Explainandcalculateexpectedshortfall(ES),andcompareandcontrastVaRandES.

• Describespectralriskmeasures,andexplainhowVaRandESarespecialcasesofspectralriskmeasures.

• Describehowtheresultsofscenarioanalysiscanbeinterpretedascoherentriskmeasures.

• Explainhowassetreturndistributionstendtodeviatefromthenormaldistribution.

• Explainreasonsforfattailsinareturndistributionanddescribetheirimplications.

• Distinguishbetweenconditionalandunconditionaldistributions.

• Describetheimplicationsofregimeswitchingonquantifyingvolatility.

• EvaluatethevariousapproachesforestimatingVaR.

• NEW:Compareandcontrastdifferentparametricandnon-parametricapproachesforestimatingconditionalvolatility.

• NEW:Calculateconditionalvolatilityusingparametricandnon-parametricapproaches.

• Evaluateimpliedvolatilityasapredictoroffuturevolatilityanditsshortcomings.

• NEW:Explainlonghorizonvolatility/VaRandtheprocessofmeanreversionaccordingtoanGARCH(1,1)model.

• Calculateconditionalvolatilitywithandwithoutmeanreversion.

• NEW:Describetheimpactofmeanreversiononlonghorizonconditionalvolatilityestimation.

• NEW:Describeanexampleofupdatingcorrelationestimates.

!

!

!

!

!

2019 2020

Arnaud de Servigny and Olivier Renault, Measuring and Managing Credit Risk

(New York: McGraw-Hill, 2004).Chapter 2. External and Internal Ratings


(New York: Pearson, 2014). Chapter 13. Binomial Trees

VRM-4 VRM-4

• CalculatethevalueofanAmericanandaEuropeancallorputoptionusingaone-stepandtwo-stepbinomialmodel.

• Describehowvolatilityiscapturedinthebinomialmodel.

• Describehowthevaluecalculatedusingabinomialmodelconvergesastimeperiodsareadded.

• Explainhowthebinomialmodelcanbealteredtopriceoptionson:stockswithdividends,stockindices,currencies,andfutures.

• Defineandcalculatedeltaofastockoption.

• Describeexternalratingscales,theratingprocess,andthelinkbetweenratingsanddefault.

• Describetheimpactoftimehorizon,economiccycle,industry,andgeographyonexternalratings.

• NEW:Defineandusethehazardratetocalculateunconditionaldefaultprobabilityofacreditasset.

• NEW:Definerecoveryrateandcalculatetheexpectedlossfromaloan.

• NEW:Explainandcomparethethrough-the-cycleandat-the-pointinternalratingsapproaches

• NEW:Describealternativemethodstocreditratingsproducedbyratingagencies.

• Compareexternalandinternalratingsapproaches.

• NEW:Describeandinterpretaratingstransitionmatrixandexplainitsuses.

• Explainthepotentialimpactofratingschangesonbondandstockprices.

• NEW:Explainhistoricalfailuresandpotentialchallengestotheuseofcreditratingsinmakinginvestmentdecisions.

!

!

!

!

!

!

2019 2020

Aswath Damodaran, Country Risk: Determinants, Measures and Implications -

The 2018 Edition


(New York: Pearson, 2014). Chapter 15. The Black-Scholes-Merton Model

VRM-5 VRM-5

• Explainthelognormalpropertyofstockprices,thedistributionofratesofreturn,andthecalculationofexpectedreturn.

• Computetherealizedreturnandhistoricalvolatilityofastock.

• DescribetheassumptionsunderlyingtheBlack-Scholes-Mertonoptionpricingmodel.

• ComputethevalueofaEuropeanoptionusingtheBlack-Scholes-Mertonmodelonanon-dividend-payingstock.

• Computethevalueofawarrantandidentifythecomplicationsinvolvingthevaluationofwarrants.

• DefineimpliedvolatilitiesanddescribehowtocomputeimpliedvolatilitiesfrommarketpricesofoptionsusingtheBlack-Scholes-Mertonmodel.

• ExplainhowdividendsaffectthedecisiontoexerciseearlyforAmericancallandputoptions.

• ComputethevalueofaEuropeanoptionusingtheBlack-Scholes-Mertonmodelonadividend-payingstock.

• Identifysourcesofcountryrisk.

• Explainhowacountry’spositionintheeconomicgrowthlifecycle,politicalrisk,legalrisk,andeconomicstructureaffectitsriskexposure.

• NEW:Evaluatecompositemeasuresofriskthatincorporateallmajortypesofcountryrisk.

• Compareinstancesofsovereigndefaultinbothforeigncurrencydebtandlocalcurrencydebt,andexplaincommoncausesofsovereigndefaults.

• Describetheconsequencesofsovereigndefault.

• Describefactorsthatinfluencethelevelofsovereigndefaultrisk;explainandassesshowratingagenciesmeasuresovereigndefaultrisks.

• NEW:DescribecharacteristicsofsovereigncreditspreadsandsovereignCDS,andcomparetheuseofsovereignspreadstocreditratings.

!

!

2019 2020

Gerhard Schroeck, Risk Management and Value Creation in Financial Institutions (New York: John Wiley & Sons, 2002).


(New York: Pearson, 2014). Chapter 19. Greek Letters

VRM-6 VRM-6

• Describeandassesstherisksassociatedwithnakedandcoveredoptionpositions.

• Explainhownakedandcoveredoptionpositionsgenerateastoplosstradingstrategy.

• Describedeltahedgingforanoption,forward,andfuturescontracts.

• Computethedeltaofanoption.

• Describethedynamicaspectsofdeltahedginganddistinguishbetweendynamichedgingandhedge-and-forgetstrategy.

• Definethedeltaofaportfolio.

• Defineanddescribetheta,gamma,vega,andrhoforoptionpositions.

• Explainhowtoimplementandmaintainadeltaneutralandagammaneutralposition.

• Describetherelationshipbetweendelta,theta,gamma,andvega.

• Describehowhedgingactivitiestakeplaceinpractice,anddescribehowscenarioanalysiscanbeusedtoformulateexpectedgainsandlosseswithoptionpositions.

• Describehowportfolioinsurancecanbecreatedthroughoptioninstrumentsandstockindexfutures.

• Evaluateabank’seconomiccapitalrelativetoitslevelofcreditrisk.

• NEW:Explainthedistinctionsbetweeneconomiccapitalandregulatorycapital,anddescribehoweconomiccapitalisderived.Identifyanddescribeimportantfactorsusedtocalculateeconomiccapitalforcreditrisk:probabilityofdefault,exposure,andlossrate.

• Defineandcalculateexpectedloss(EL).

• NEW:Defineandexplainunexpectedloss(UL).

• NEW:Estimatethemeanandstandarddeviationofcreditlossesassumingabinomialdistribution.

• NEW:DescribetheGaussiancopulamodelanditsapplication.

• NEW:DescribeandapplytheVasicekmodeltoestimatedefaultrateandcreditriskcapitalforabank.

• NEW:DescribetheCreditMetricsmodelandexplainhowitisappliedinestimatingeconomiccapital.

• NEW:DescribeandusetheEuler’stheoremtodeterminethecontributionofaloantotheoverallriskofaportfolio.

• NEW:Explainwhyitismoredifficulttocalculatecreditriskcapitalforderivativesthanforloans.

• Describechallengestoquantifyingcreditrisk.

!

!

!

!

!

!

!

!

2019 2020

John Hull, Risk Management and Financial Institutions, 4th Edition

(Hoboken, NJ: John Wiley & Sons, 2015).Chapter 23. Operational Risk

Bruce Tuckman, Fixed Income Securities, 3rd Edition

(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 1. Prices, Discount Factors, and Arbitrage

VRM-7 VRM-7

• Definediscountfactoranduseadiscountfunctiontocomputepresentandfuturevalues.

• Definethe“lawofoneprice,”explainitusinganarbitrageargument,anddescribehowitcanbeappliedtobondpricing.

• IdentifythecomponentsofaU.S.Treasurycouponbond,andcompareandcontrastthestructuretoTreasurySTRIPS,includingthedifferencebetweenP-STRIPSandC-STRIPS.

• Constructareplicatingportfoliousingmultiplefixedincomesecuritiestomatchthecashflowsofagivenfixedincomesecurity.

• Identifyarbitrageopportunitiesforfixedincomesecuritieswithcertaincashflows.

• Differentiatebetween“clean”and“dirty”bondpricingandexplaintheimplicationsofaccruedinterestwithrespecttobondpricing.

• Describethecommonday-countconventionsusedinbondpricing.

• NEW:Describethedifferentcategoriesofoperationalriskandexplainhoweachtypeofriskcanarise.

• NEW:Comparethebasicindicatorapproach,thestandardizedapproach,andtheadvancedmeasurementapproachforcalculatingoperationalriskregulatorycapital.

• NEW:DescribethestandardizedmeasurementapproachandexplainthereasonsforitsintroductionbytheBaselcommittee.

• NEW:ExplainhowalossdistributionisderivedfromanappropriatelossfrequencydistributionandlossseveritydistributionusingMonteCarlosimulations.

• Describethecommondataissuesthatcanintroduceinaccuraciesandbiasesintheestimationoflossfrequencyandseveritydistributions.

• Describehowtousescenarioanalysisininstanceswhendataisscarce.

• NEW:DescribehowtoidentifycausalrelationshipsandhowtouseRiskandControlSelf-Assessment(RCSA),KeyRiskIndicators(KRIs),andeducationtomeasureandmanageoperationalrisks.

• Describetheallocationofoperationalriskcapitaltobusinessunits.

• Explainhowtousethepowerlawtomeasureoperationalrisk.

• Explaintherisksofmoralhazardandadverseselectionwhenusinginsurancetomitigateoperationalrisks.

!

!

!

!

!

2019 2020

Stress Testing: Approaches, Methods, and Applications, Edited by Akhtar Siddique and Iftekhar Hasan

(London: Risk Books, 2013). Chapter 1. Governance over Stress Testing

Chapter 2. Stress Testing and Other Risk Management Tools


(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 2. Spot, Forward and Par Rates

VRM-8 VRM-8

• Calculateandinterprettheimpactofdifferentcompoundingfrequenciesonabond’svalue.

• Calculatediscountfactorsgiveninterestrateswaprates.

• Computespotratesgivendiscountfactors.

• Interprettheforwardrate,andcomputeforwardratesgivenspotrates.

• Defineparrateanddescribetheequationfortheparrateofabond.

• Interprettherelationshipbetweenspot,forwardandparrates.

• Assesstheimpactofmaturityonthepriceofabondandthereturnsgeneratedbybonds.

• Definethe“flattening”and“steepening”ofratecurvesanddescribeatradetoreflectexpectationsthatacurvewillflattenorsteepen.

• Describetherationalefortheuseofstresstestingasariskmanagementtool.

• NEW:Identifykeyaspectsofstresstestinggovernance,includingchoiceofscenarios,regulatoryspecifications,modelbuilding,stress-testingcoverage,capitalandliquiditystresstesting,andreversestresstesting.

• Describetherelationshipbetweenstresstestingandotherriskmeasures,particularlyinenterprise-widestresstesting.

• NEW:ExplaintheimportanceofstressedinputsandtheirimportanceinstressedVaRandstressedES.

• Identifytheadvantagesanddisadvantagesofstressedriskmetrics.

• Describethekeyelementsofeffectivegovernanceoverstresstesting.

• Describetheresponsibilitiesoftheboardofdirectorsandseniormanagementinstresstestingactivities.

• NEW:Identifyelementsofclearandcomprehensivepolicies,procedures,anddocumentationsforstresstesting.

• NEW:Identifyareasofvalidationandindependentreviewforstressteststhatrequireattentionfromagovernanceperspective.

• Describetheimportantroleoftheinternalauditinstresstestinggovernanceandcontrol.

• NEW:DescribetheBaselstresstestingprinciplesforbanksregardingtheimplementationofstresstesting.

!

!

!

!

!

2019 2020


(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 1. Prices, Discount Factors, and Arbitrage


(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 3. Returns, Spreads and Yields

VRM-9 VRM-9

• Distinguishbetweengrossandnetrealizedreturns,andcalculatetherealizedreturnforabondoveraholdingperiodincludingreinvestments.

• Defineandinterpretthespreadofabond,andexplainhowaspreadisderivedfromabondpriceandatermstructureofrates.

• Define,interpret,andapplyabond’syield-to-maturity(YTM)tobondpricing.

• Computeabond’sYTMgivenabondstructureandprice.

• Calculatethepriceofanannuityandaperpetuity.

• ExplaintherelationshipbetweenspotratesandYTM.

• Definethecouponeffectandexplaintherelationshipbetweencouponrate,YTM,andbondprices.

• ExplainthedecompositionofP&Lforabondintoseparatefactorsincludingcarryroll-down,ratechangeandspreadchangeeffects.

• Identifythemostcommonassumptionsincarryroll-downscenarios,includingrealizedforwards,unchangedtermstructure,andunchangedyields.

• Definediscountfactoranduseadiscountfunctiontocomputepresentandfuturevalues.

• Definethe“lawofoneprice,”explainitusinganarbitrageargument,anddescribehowitcanbeappliedtobondpricing.

• Identifyarbitrageopportunitiesforfixedincomesecuritieswithcertaincashflows.

• NEW:IdentifythecomponentsofaUSTreasurycouponbond,andcomparethestructuretoTreasurySTRIPS,includingthedifferencebetweenP-STRIPSandC-STRIPS.

• NEW:Constructareplicatingportfoliousingmultiplefixedincomesecuritiestomatchthecashflowsofagivenfixed-incomesecurity.

• NEW:Differentiatebetween“clean”and“dirty”bondpricingandexplaintheimplicationsofaccruedinterestwithrespecttobondpricing.

• NEW:Describethecommonday-countconventionsusedinbondpricing.

!

!

!

!

2019 2020


(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 2. Spot, Forward and Par Rates


(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 4. One-Factor Risk Metrics and Hedges

VRM-10 VRM-10

• Describeaninterestratefactorandidentifycommonexamplesofinterestratefactors.

• DefineandcomputetheDV01ofafixedincomesecuritygivenachangeinyieldandtheresultingchangeinprice.

• CalculatethefaceamountofbondsrequiredtohedgeanoptionpositiongiventheDV01ofeach.

• Define,compute,andinterprettheeffectivedurationofafixedincomesecuritygivenachangeinyieldandtheresultingchangeinprice.

• CompareandcontrastDV01andeffectivedurationasmeasuresofpricesensitivity.

• Define,compute,andinterprettheconvexityofafixedincomesecuritygivenachangeinyieldandtheresultingchangeinprice.

• Explaintheprocessofcalculatingtheeffectivedurationandconvexityofaportfoliooffixedincomesecurities.

• Explaintheimpactofnegativeconvexityonthehedgingoffixedincomesecurities.

• Constructabarbellportfoliotomatchthecostanddurationofagivenbulletinvestment,andexplaintheadvantagesanddisadvantagesofbulletversusbarbellportfolios.

• Calculateandinterprettheimpactofdifferentcompoundingfrequenciesonabond’svalue.

• NEW:Definespotrateandcomputespotratesgivendiscountfactors.

• Interprettheforwardrate,andcomputeforwardratesgivenspotrates.

• Defineparrateanddescribetheequationfortheparrateofabond.

• NEW:Interprettherelationshipbetweenspot,forward,andparrates.

• Assesstheimpactofmaturityonthepriceofabondandthereturnsgeneratedbybonds.

• NEW:Definethe“flattening”and“steepening”ofratecurvesanddescribeatradetoreflectexpectationsthatacurvewillflattenorsteepen.

• NEW:Describeaswaptransactionandexplainhowaswapmarketdefinesparrates.

!

!

!

!

2019 2020


(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 3. Returns, Spreads and Yields

Bruce Tuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011).

Chapter 5. Multi-Factor Risk Metrics and Hedges

VRM-11 VRM-11

• Describeandassessthemajorweaknessattributabletosingle-factorapproacheswhenhedgingportfoliosorimplementingassetliabilitytechniques.

• Definekeyrateexposuresandknowthecharacteristicsofkeyrateexposurefactorsincludingpartial‘01sandforward-bucket‘01s.

• Describekey-rateshiftanalysis.

• Define,calculate,andinterpretkeyrate‘01andkeyrateduration.

• Describethekeyrateexposuretechniqueinmulti-factorhedgingapplications;summarizeitsadvantagesanddisadvantages.

• Calculatethekeyrateexposuresforagivensecurity,andcomputetheappropriatehedgingpositionsgivenaspecifickeyrateexposureprofile.

• Relatekeyrates,partial‘01sandforward-bucket‘01s,andcalculatetheforwardbucket‘01forashiftinratesinoneormorebuckets.

• Constructanappropriatehedgeforapositionacrossitsentirerangeofforwardbucketexposures.

• Applykeyrateandmulti-factoranalysistoestimatingportfoliovolatility.

• Distinguishbetweengrossandnetrealizedreturns,andcalculatetherealizedreturnforabondoveraholdingperiodincludingreinvestments.

• Defineandinterpretthespreadofabond,andexplainhowaspreadisderivedfromabondpriceandatermstructureofrates.

• NEW:Define,interpret,andapplyabond’syield-to-maturity(YTM)tobondpricing.

• NEW:Computeabond’sYTMgivenabondstructureandprice.

• Calculatethepriceofanannuityandaperpetuity.

• NEW:ExplaintherelationshipbetweenspotratesandYTM.

• Definethecouponeffectandexplaintherelationshipbetweencouponrate,YTM,andbondprices.

• NEW:Explainthedecompositionoftheprofitandloss(P&L)forabondpositionorportfoliointoseparatefactorsincludingcarryroll-down,ratechange,andspreadchangeeffects.

• NEW:Explainthefollowingfourcommonassumptionsincarryroll-downscenarios:realizedforwards,unchangedtermstructure,unchangedyields,andrealizedexpectationsofshort-termrates;andcalculatecarryrolldownundertheseassumptions.

!

!

!

!

!

2019 2020


(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 4. One-Factor Risk Metrics and Hedges

Aswath Damodaran, Country Risk: Determinants, Measures and Implications -

The 2017 Edition (July 19, 2017). (Pages 1-47 only).

VRM-12 VRM-12

• Identifysourcesofcountryrisk.

• Explainhowacountry’spositionintheeconomicgrowthlifecycle,politicalrisk,legalrisk,andeconomicstructureaffectitsriskexposure.

• Evaluatecompositemeasuresofriskthatincorporatealltypesofcountryriskandexplainlimitationsoftheriskservices.

• Compareinstancesofsovereigndefaultinbothforeigncurrencydebtandlocalcurrencydebt,andexplaincommoncausesofsovereigndefaults.

• Describetheconsequencesofsovereigndefault.

• Describefactorsthatinfluencethelevelofsovereigndefaultrisk;explainandassesshowratingagenciesmeasuresovereigndefaultrisks.

• Describetheadvantagesanddisadvantagesofusingthesovereigndefaultspreadasapredictorofdefaults.

• NEW:Describeaone-factorinterestratemodelandidentifycommonexamplesofinterestratefactors.

• DefineandcomputetheDV01ofafixedincomesecuritygivenachangeinyieldandtheresultingchangeinprice.

• CalculatethefaceamountofbondsrequiredtohedgeanoptionpositiongiventheDV01ofeach.

• Define,compute,andinterprettheeffectivedurationofafixedincomesecuritygivenachangeinyieldandtheresultingchangeinprice.

• CompareandcontrastDV01andeffectivedurationasmeasuresofpricesensitivity.

• Define,compute,andinterprettheconvexityofafixedincomesecuritygivenachangeinyieldandtheresultingchangeinprice.

• Explaintheprocessofcalculatingtheeffectivedurationandconvexityofaportfoliooffixedincomesecurities.

• NEW:Describeanexampleofhedgingbasedoneffectivedurationandconvexity.

• Constructabarbellportfoliotomatchthecostanddurationofagivenbulletinvestment,andexplaintheadvantagesanddisadvantagesofbulletversusbarbellportfolios.

!

!

2019 2020

Bruce Tuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011).

Chapter 5. Multi-Factor Risk Metrics and Hedges

Arnaud de Servigny and Olivier Renault, Measuring and Managing Credit Risk

(New York: McGraw-Hill, 2004).Chapter 2. External and Internal Ratings

VRM-13 VRM-13

• Describeexternalratingscales,theratingprocess,andthelinkbetweenratingsanddefault.

• Describetheimpactoftimehorizon,economiccycle,industry,andgeographyonexternalratings.

• Explainthepotentialimpactofratingschangesonbondandstockprices.

• Compareexternalandinternalratingsapproaches.

• Explainandcomparethethrough-the-cycleandat-the-pointinternalratingsapproaches.

• Describearatingstransitionmatrixandexplainitsuses.

• Describetheprocessforandissueswithbuilding,calibratingandbacktestinganinternalratingsystem.

• Identifyanddescribethebiasesthatmayaffectaratingsystem.

• NEW:Describeandassessthemajorweaknessattributabletosingle-factorapproacheswhenhedgingportfoliosorimplementingassetliabilitytechniques.

• NEW:Describetheprincipalcomponentsanalysisandexplainitsuseinunderstandingtermstructuremovements.

• NEW:Definekeyrateexposuresandknowthecharacteristicsofkeyrateexposurefactorsincludingpartial‘01sandforward-bucket‘01s.

• NEW:Describekey-rateshiftanalysis.

• Define,calculate,andinterpretkeyrate‘01andkeyrateduration.

• NEW:Describethekeyrateexposuretechniqueinmulti-factorhedgingapplications;summarizeitsadvantagesanddisadvantages.

• Calculatethekeyrateexposuresforagivensecurity,andcomputetheappropriatehedgingpositionsgivenaspecifickeyrateexposureprofile.

• NEW:Relatekeyrates,partial‘01sandforward-bucket‘01s,andcalculatetheforward-bucket‘01forashiftinratesinoneormorebuckets.

• NEW:Applykeyrateandmulti-factoranalysistoestimatingportfoliovolatility.

!

!

!

!

!

!

!

2019 2020


(New York: Pearson, 2017). Chapter 13.

Gerhard Schroeck, Risk Management and Value Creation in Financial Institutions (New York: John Wiley & Sons, 2002).

Chapter 5. Capital Structure in Banks (pp. 170-186 only)

VRM-14 VRM-14

• Evaluateabank’seconomiccapitalrelativetoitslevelofcreditrisk

• Identifyanddescribeimportantfactorsusedtocalculateeconomiccapitalforcreditrisk:probabilityofdefault,exposure,andlossrate.

• Defineandcalculateexpectedloss(EL).

• Defineandcalculateunexpectedloss(UL).

• Estimatethevarianceofdefaultprobabilityassumingabinomialdistribution.

• CalculateULforaportfolioandtheriskcontributionofeachasset.

• Describehoweconomiccapitalisderived.

• Explainhowthecreditlossdistributionismodeled.

• Describechallengestoquantifyingcreditrisk.

• NEW:CalculatethevalueofanAmericanandaEuropeancallorputoptionusingaone-stepandtwo-stepbinomialmodel.

• Describehowvolatilityiscapturedinthebinomialmodel.

• Describehowthevaluecalculatedusingabinomialmodelconvergesastimeperiodsareadded.

• Defineandcalculatedeltaofastockoption.

• NEW:Explainhowthebinomialmodelcanbealteredtopriceoptionsonstockswithdividends,stockindices,currencies,andfutures.

!

!

2019 2020


(New York: Pearson, 2014). Chapter 15. The Black-Scholes-Merton Model

John Hull, Risk Management and Financial Institutions, 4th Edition

(Hoboken, NJ: John Wiley & Sons, 2015).Chapter 23. Operational Risk

VRM-15 VRM-15

• Comparethreeapproachesforcalculatingregulatorycapital.

• DescribetheBaselCommittee’ssevencategoriesofoperationalrisk.

• DerivealossdistributionfromthelossfrequencydistributionandlossseveritydistributionusingMonteCarlosimulations.

• Describethecommondataissuesthatcanintroduceinaccuraciesandbiasesintheestimationoflossfrequencyandseveritydistributions.

• Describehowtousescenarioanalysisininstanceswhendataisscarce.

• Describehowtoidentifycausalrelationshipsandhowtouseriskandcontrolself-assessment(RCSA)andkeyriskIndicators(KRIs)tomeasureandmanageoperationalrisks.

• Describetheallocationofoperationalriskcapitaltobusinessunits.

• Explainhowtousethepowerlawtomeasureoperationalrisk.

• Explaintherisksofmoralhazardandadverseselectionwhenusinginsurancetomitigateoperationalrisks.

• Explainthelognormalpropertyofstockprices,thedistributionofratesofreturn,andthecalculationofexpectedreturn.

• Computetherealizedreturnandhistoricalvolatilityofastock.

• NEW:DescribetheassumptionsunderlyingtheBlack-Scholes-Mertonoptionpricingmodel.

• NEW:ComputethevalueofaEuropeanoptionusingtheBlack-Scholes-Mertonmodelonanon-dividend-payingstock.

• NEW:DefineimpliedvolatilitiesanddescribehowtocomputeimpliedvolatilitiesfrommarketpricesofoptionsusingtheBlack-Scholes-Mertonmodel.

• ExplainhowdividendsaffectthedecisiontoexerciseearlyforAmericancallandputoptions.

• NEW:ComputethevalueofaEuropeanoptionusingtheBlack-Scholes-Mertonmodelonadividend-payingstock,futures,andexchangerates.

• NEW:Describewarrants,calculatethevalueofawarrant,andcalculatethedilutioncostofthewarranttoexistingshareholders.

!

!

!

!

!

2019 2020


(New York: Pearson, 2014). Chapter 19. Greek Letters

Stress Testing: Approaches, Methods, and Applications, Edited by Akhtar Siddique and Iftekhar Hasan

(London: Risk Books, 2013). Chapter 1. Governance over Stress Testing

VRM-16 VRM-16

• Describethekeyelementsofeffectivegovernanceoverstresstesting.

• Describetheresponsibilitiesoftheboardofdirectorsandseniormanagementinstresstestingactivities.

• Identifyelementsofclearandcomprehensivepolicies,proceduresanddocumentationsonstresstesting.

• Identifyareasofvalidationandindependentreviewforstressteststhatrequireattentionfromagovernanceperspective.

• Describetheimportantroleoftheinternalauditinstresstestinggovernanceandcontrol.

• Identifykeyaspectsofstresstestinggovernance,includingstress-testingcoverage,stress-testingtypesandapproaches,and,capitalandliquiditystresstesting

• Describeandassesstherisksassociatedwithnakedandcoveredoptionpositions.

• NEW:Describetheuseofastoplosshedgingstrategy,includingitsadvantagesanddisadvantages,andexplainhowthisstrategycangeneratenakedandcoveredoptionpositions.

• Describedeltahedgingforanoption,forward,andfuturescontracts.

• Computethedeltaofanoption.

• NEW:Describethedynamicaspectsofdeltahedginganddistinguishbetweendynamichedgingandhedge-and-forgetstrategy.

• NEW:Defineandcalculatethedeltaofaportfolio.

• NEW:Defineanddescribetheta,gamma,vega,andrhoforoptionpositions,andcalculatethegammaandvegaforaportfolio.

• NEW:Explainhowtoimplementandmaintainadelta-neutralandagamma-neutralposition.

• Describetherelationshipbetweendelta,theta,gamma,andvega.

• Describehowportfolioinsurancecanbecreatedthroughoptioninstrumentsandstockindexfutures.

!

!

!!

!

part i frm - efficientlearning.com · journal of economic perspectives 23:1, 77—100 frm-7 frm-7...

Documents