FRM study guide 2017 part 2

Portfolio Credit Risk Sections 8.1,8.2,8.3 only 135 Lesson: Allan Malz, Financial Risk Management: Models, History, and Institutions Hoboken, NJ: John Wiley & Sons, 2011.. Lesson: Jon Gr

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COVERS EVERY LEARNING OBJECTIVE ON THE EXAM

W I L E Y

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Wiley FRM Exam Review Study Guide 2017

Fart II

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Wiley FRM Exam Review Study Guide 2017

Part II

Market Risk Measurement and Management,

Credit Risk Measurement and Management,

Operational and Integrated Risk Management,

Risk Management and Investment Management, Current Issues in Financial Markets

Christian H Cooper, CFA, FRM

W i l e y

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Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Library o f Congress Cataloging-in-Publication Data:

ISBN 978-1-119-38577-6

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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Market Risk Measurement and Management

Lesson: Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England:

John Wiley & Sons, 2005) Chapter 3 Estimating Market Risk Measures:

Lesson: Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England:

John Wiley & Sons, 2005) Chapter 4 Non-Parametric Approaches 11

Lesson: Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk,

3rd Edition (New York: McGraw-Hill, 2007) Chapter 6 Backtesting VaR 15

Lesson: Philippe Jorion, Vaiue-at-Risk: The New Benchmark for Managing Financial Risk,

3rd Edition (New York: McGraw-Hill, 2007) Chapter 11 VaR Mapping 19

Lesson: "Messages from the Academic Literature on Risk Measurement for the Trading Book,"

Basel Committee on Banking Supervision, Working Paper No 19, January 2011 25

Lesson: Gunter Meissner, Correlation Risk Modeling and Management

(Hoboken, NJ: John Wiley & Sons, 2014) Chapter 1 Some Correlation Basics:

Lesson: Gunter Meissner, Correlation Risk Modeling and Management (Hoboken, NJ:

John Wiley & Sons, 2014) Chapter 2 Empirical Properties of Correlation:

Lesson: Gunter Meissner, Correlation Risk Modeling and Management (New York:

John Wiley & Sons, 2014) Chapter 3 Statistical Correlation Models— Can We Apply

Lesson: Gunter Meissner, Correlation Risk Modeling and Management (Hoboken, NJ:

John Wiley & Sons, 2014) Chapter 4 Financial Correlation Modeling— Bottom-Up Approaches

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Lesson: M ce T u ckm n , Fixed Income Securities, M Edition (Hoboken, NJ: John Wiley & Sons, 2011)

Chapter 6 Empirical Approaches to Risk Metrics and Hedges 49

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

Lesson: BruceTuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011)

Chapter 8 The Evolution of Short Rates and the Shape of the Term Structure 63

Lesson: BruceTuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011)

Chapter 10 The Art of Term Structure Models: Volatility and Distribution 77

Lesson: John Hull, Options, Futures, and Other Derivatives, 9th Edition (New York:

Pearson Prentice Hall, 2014) Chapter 9 OIS Discounting, Credit Issues, and Funding Costs 81

Lesson: John Hull, Options, Futures, and Other Derivatives, 9th Edition (New York:

Pearson Prentice Hall, 2014) Chapter 20 Volatility Smiles 85

Credit Risk Measurement and Management

Lesson: Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook

(Hoboken, NJ: John Wiley & Sons, 2013) Chapter 1 The Credit Decision 91

Lesson: Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook

(Hoboken, NJ: John Wiley & Sons, 2013) Chapter 2 The Credit Analyst 95

Lesson: Giacomo De Laurentis, Renato Maino, and Luca Molteni, Developing,

Validating and Using Internal Ratings (West Sussex, United Kingdom: John Wiley & Sons, 2010).

Chapter 2 Classifications and Key Concepts of Credit Risk 97

Validating and Using Internal Ratings (West Sussex, United Kingdom: John Wiley & Sons, 2010).

Chapter 3 Ratings Assignment Methodologies 105

Lesson: Rene Stulz, Risk Management & Derivatives (Florence, KY: Thomson South-Western, 2002)

Lesson: Allan Malz, Financial Risk Management: Models, History, and Institutions

(Hoboken, NJ: John Wiley & Sons, 2011) Chapter 7 Spread Risk and Default Intensity Models 127

Lesson: Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ:

John Wiley & Sons, 2011) Chapter 8 Portfolio Credit Risk (Sections 8.1,8.2,8.3 only) 135

Lesson: Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ:

John Wiley & Sons, 2011) Chapter 9 Structured Credit Risk 139

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Lesson: Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge

for Global Financial Markets, 2nd Edition (West Sussex, UK: John Wiley & Sons, 2012).

Lesson: Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge

for Global Financial Markets, 2nd Edition (West Sussex, UK: John Wiley & Sons, 2012).

Chapter 4 Netting, Compression, Resets, and Termination Features 151

Lesson: Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing

Challenge for Global Financial Markets, 2nd Edition (West Sussex, UK: John Wiley & Sons, 2012).

Chapter 10 Default Probability, Credit Spreads, and Credit Derivatives 171

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

Iftekhar Hasan (London: Risk Books, 2013) Chapter 4 The Evolution of Stress Testing

Lesson: Michel Crouhy, Dan Galai, and Robert Mark, The Essentials o f Risk Management, 2nd Edition

(New York: McGraw-Hill, 2014) Chapter 9 Credit Scoring and Retail Credit Risk Management 191

Lesson: Michel Crouhy, Dan Galai, and Robert Mark, The Essentials o f Risk Management, 2nd Edition

(New York: McGraw-Hill, 2014) Chapter 12 The Credit Transfer Markets— and Their Implications 197

Lesson: Moorad Choudhry, Structured Credit Products: Credit Derivatives & Synthetic Securitization,

2nd Edition (Hoboken, NJ: John Wiley & Sons, 2010) Chapter 12 An Introduction to Securitization 205Lesson: Adam Ashcraft and Til Schuermann/'Understanding the Securitization of Subprime

Mortgage Credit," Federal Reserve Bank of New York Staff Reports, No 318 (March 2008) 215

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Operational and Integrated Risk Management

Lesson: "Principles for the Sound Management of Operational Risk" (Basel Committee on

Lesson: Brian Noccoand Rene Stulz,"Enterprise Risk Management: Theory and Practice,

Journal o f Applied Corporate Finance 18, no 4 (2006): 8-20 229Lesson: "Observations on Developments in Risk Appetite Frameworks and IT Infrastructure,"

Lesson: Anthony Tarantino and Deborah Cernauskas, Risk Management in Finance: Six Sigma

and Other Next Generation Techniques (Hoboken, NJ: John Wiley & Sons, 2009).

Chapter 3 Information Risk and Data Quality Management 239

Lesson: Marcelo G Cruz, Gareth W Peters, and Pavel V Shevchenko, Fundamental Aspects

o f Operational Risk and Insurance Analytics: A Handbook o f Operational Risk (Hoboken,

NJ: John Wiley & Sons, 2015) Chapter 2 OpRisk Data and Governance 241

Lesson: Philippa X Girling, Operational Risk Management: A Complete Guide to a

Successful Operational Risk Framework (Hoboken, NJ: John Wiley & Sons, 2013) Chapter 8.

Lesson: Philippa X Girling, Operational Risk Management: A Complete Guide to a

Successful Operational Risk Framework (Hoboken, NJ: John Wiley & Sons, 2013).

Chapter 12 Capital Modeling 251

Lesson: "Standardised Measurement Approach for Operational Risk— ConsultativeDocument" (Basel Committee on Banking Supervision Publication, March 2016) 255

Lesson: Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, UK: John

Wiley & Sons, 2005) Chapter 7 Parametric Approaches (II): Extreme Value 259

Validating, and Using Internal Ratings (Hoboken, NJ: John Wiley & Sons, 2010.

Lesson: Michel Crouhy, Dan Galai, and Robert Mark, The Essentials o f Risk Management,

2nd Edition (New York: McGraw-Hill, 2014) Chapter 15 Model Risk 267

Lesson: Michel Crouhy, Dan Galai, and Robert Mark, The Essentials o f Risk Management,

2nd Edition (New York: McGraw-Hill, 2014) Chapter 17 Risk Capital Attribution and

Lesson: "Range of Practices and Issues in Economic Capital Frameworks" (BaselCommittee on Banking Supervision Publication, March 2009) 275Lesson: "Capital Planning at Large Bank Holding Companies: Supervisory Expectations and

Range of Current Practice," Board of Governors of the Federal Reserve System, August 2013 285

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Lesson: Bruce Tuckman and Angel Serrat, Fixed Income Securities: Tools for Today's

Markets, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011) Chapter 12 Repurchase

Lesson: Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex,

UK: John Wiley & Sons, 2005) Chapter 14 Estimating Liquidity Risks 299

(Hoboken, NJ: John Wiley & Sons, 2011) Chapter 11 Section 11.1, Assessing the

(Hoboken, NJ: John Wiley & Sons, 2011) Chapter 12 Liquidity and Leverage 307

Lesson: Darrell Duffie,"The Failure Mechanics of Dealer Banks,"

Journal o f Economic Perspectives 24, no 1 (2010): 51-72 317

Lesson: Til Schuermann, "Stress Testing Banks "prepared for the Committee on

Capital Market Regulation, Wharton Financial Institutions Center, April 2012 321

Lesson: "Guidance on Managing Outsourcing Risk," Board of Governors of the

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

(Hoboken, NJ: John Wiley & Sons, 2015) Chapter 15 Basel I, Basel II, and Solvency II 329

(Hoboken, NJ: John Wiley & Sons, 2015) Chapter 16 Basel II.5, Basel III,

(Hoboken, NJ: John Wiley & Sons, 2015) Chapter 17 Fundamental Review of the Trading Book 345

Risk Management and Investment Management

Lesson: Andrew Ang, Asset Management: A Systematic Approach to Factor Investing

(New York: Oxford University Press, 2014) Chapter 6 Factor Theory 353

(New York: Oxford University Press, 2014) Chapter 7 Factors 363

(New York: Oxford University Press, 2014) Chapter 10 Alpha (and the Low-Risk Anomaly) 369

(New York: Oxford University Press, 2014) Chapter 13 Illiquid Assets (excluding

section 13.5, Portfolio Choice with Illiquid Assets) 379

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Lesson: Richard Grinold and Ronald Kahn, Active Portfolio Management: A

Quantitative Approach for Producing Superior Returns and Controlling Risk, 2nd Edition

(New York: McGraw-Hill, 2000) Chapter 14 Portfolio Construction 383

Lesson: Philippe Jorion, Value a t Risk: The New Benchmark for Managing Financial Risk,

3rd Edition (New York: McGraw-Hill, 2007) Chapter 7 Portfolio Risk: Analytical Methods 389

Lesson: Philippe Jorion, Value a t Risk: The New Benchmark for Managing Financial Risk,

3rd Edition (New York: McGraw-Hill, 2007) Chapter 17 VaR and Risk Budgeting in

Lesson: Robert Litterman and the Quantitative Resources Group, Modern Investment

Management: An Eguilibrium Approach (Hoboken, NJ: John Wiley & Sons, 2003).

Chapter 17 Risk Monitoring and Performance Measurement 399

Lesson: Zvi Bodie, Alex Kane, and Alan J Marcus, Investments, 10th Edition

(New York: McGraw-Hill, 2013) Chapter 24 Portfolio Performance Evaluation 405

Lesson: G Constantinides, M Harris, and R Stulz, eds., Handbook o f the Economics o f

Finance, Volume 2B (Oxford, UK: Elsevier, 2013) Chapter 17 Hedge Funds, by William

Lesson: Kevin R Mirabile, Hedge Fund Investing: A Practical Approach to Understanding

Investor Motivation, Manager Profits, and Fund Performance (Hoboken, NJ: Wiley

Finance, 2013) Chapter 11 Performing Due Diligence on Specific Managers and Funds 421

Current Issues in Financial Markets

Lesson: Rainer Bohme, Nicolas Christin, Benjamin Edelman, and Tyler Moor, "Bitcoin:

Economics, Technology, and Governance!'Journal o f Economic Perspectives,

Lesson: Dudley, William C., "Market and Funding Liquidity— An Overview," Remarks at the Federal Reserve Bank of Atlanta 2016 Financial Markets Conference, Fernandina Beach,

Lesson: "Chapter 2: Market Liquidity - Resilient or Fleeting?" International MonetaryFund, Global Financial Stability Report, October 2015 433Lesson: "Algorithmic Trading Briefing Note," Federal Reserve Bank of New York, April 2015 437Lesson: Morten Bech, Anamaria Hies, Ulf Lewrick, and Andreas Schrimpf,"Hanging Up

the Phone— Electronic Trading in Fixed Income Markets and Its Implications,''BIS Quarterly

Lesson: Morten Linnemann Bech and Aytek Malkhozov,"How Have Central Banks

Implemented Negative Policy Rates?"/?/5 Quarterly Review, March 6,2016 445Lesson: "Corporate Debt in Emerging Economies: A Threat to Financial Stability?"Committee

on International Economic Policy and Reform, Brookings Institution, September 2015 449

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How to Study for the Exam

The FRM Exam Part II curriculum covers the tools used to assess financial risk:

• Market risk measurement and management—25 %

• Credit risk measurement and management—25%

• Operational and integrated risk management—25 %

• Risk management and investment management— 15%

• Current issues in financial risk management— 10%

It is important to focus only on the learning objectives as you are asked about them and

pay close attention to the percentages of each section That is the core of my focus through

the text, the online lecture sessions, and with the practice questions A study hour doesn’t

count unless you are laser focused on specifically how GARP asks a learning objective

Consistency is also key Making a regular weekly study time is going to be important

to staying on track There is a reason only -50% of the candidates pass the exam every

year It’s a tough exam It also tests intuition, not just memorization That is why I

attempt at every opportunity to connect the dots across readings and teach how changing

environments change both markets and the models we use to model them, as well as

helping you with the questions GARP specifically wants you to calculate an outcome for

Calculator policy:

It is best to begin your study with one of the approved calculators You will not be admitted

to the exam without one of these approved calculators!

• Hewlett Packard 12C (including the HP 12C Platinum and the Anniversary Edition)

• Hewlett Packard 10B II

• Hewlett Packard 10B 11+

• Hewlett Packard 20B

• Texas Instruments BA II Plus (including the BA II Plus Professional)

Every year, candidates are turned away from the exam site because of wrong calculators

Make sure you aren’t one of them

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the FRM program because, as a candidate, he was frustrated with the quality of study programs available Writing from a practitioner’s point of view, Christian drew on his experience as a trader across fixed income and equity markets, most recently as head of derivatives trading at a bank in New York, to create a program that is very focused on exam results while connecting the dots across topics to increase intuition and understanding.Christian is active with the Aspen Institute; he is a Truman National Security Fellow, and a term member at the Council on Foreign Relations.

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