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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.
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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.
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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.
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2019 2020
James Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2014).
Chapter 4. What is ERM?
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.
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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.
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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.
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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
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2019 2020
James Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2014).
Chapter 4. What is ERM?
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.
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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
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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.
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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
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
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.
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2019 2020
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
Chapter 3. Basic Statistics
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
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.
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2019 2020
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
Chapter 4. Distributions
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
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
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
Chapter 6. Bayesian Analysis (pp. 113-124 only)
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
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.
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2019 2020
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
Chapter 7. Hypothesis Testing and Confidence Intervals
Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2013).
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.
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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.
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2019 2020
James Stock and Mark Watson, Introduction to Econometrics, Brief Edition
(Boston: Pearson Education, 2008). Chapter 5. Regression with a Single Regressor
James Stock and Mark Watson, Introduction to Econometrics, Brief Edition
(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.
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2019 2020
James Stock and Mark Watson, Introduction to Econometrics, Brief Edition
(Boston: Pearson Education, 2008). Chapter 6. Linear Regression with Multiple Regressors
James Stock and Mark Watson, Introduction to Econometrics, Brief Edition
(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.
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!!
2019 2020
James Stock and Mark Watson, Introduction to Econometrics, Brief Edition
(Boston: Pearson Education, 2008). Chapter 7. Hypothesis Tests and Confidence Intervals in
Multiple Regression
James Stock and Mark Watson, Introduction to Econometrics, Brief Edition
(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.
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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
Francis X. Diebold, Elements of Forecasting, 4th Edition (Mason, Ohio: Cengage Learning, 2006).
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.
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!
2019 2020
Francis X. Diebold, Elements of Forecasting, 4th Edition (Mason, Ohio: Cengage Learning, 2006).
Chapter 5. Modeling and Forecasting TrendChapter 6. Modeling and Forecasting Seasonality
Francis X. Diebold, Elements of Forecasting, 4th Edition (Mason, Ohio: Cengage Learning, 2006).
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.
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!
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
Francis X. Diebold, Elements of Forecasting, 4th Edition (Mason, Ohio: Cengage Learning, 2006).
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.
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2019 2020
Chris Brooks, Introductory Econometrics for Finance, 3rd Edition
(Cambridge, UK: Cambridge University Press, 2014). Chapter 3.
Francis X. Diebold, Elements of Forecasting, 4th Edition (Mason, Ohio: Cengage Learning, 2006).
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.
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2019 2020
John C. Hull, Risk Management and Financial Institutions, 4th edition
(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 2. Banks
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.
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2019 2020
John C. Hull, Risk Management and Financial Institutions, 4th edition
(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 3. Insurance Companies and Pension Plans
John C. Hull, Risk Management and Financial Institutions, 4th edition
(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.
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2019 2020
John C. Hull, Risk Management and Financial Institutions, 4th edition
(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 4. Mutual Funds and Hedge Funds
John C. Hull, Risk Management and Financial Institutions, 4th edition
(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.
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2019 2020
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(New York: Pearson, 2017). Chapter 1. Introduction
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
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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
Jon Gregory, Central Counterparties: Mandatory Clearing and Bilateral Margin Requirements for OTC Derivatives
(West Sussex, UK: John Wiley & Sons, 2014). Chapter 3. Basic Principles of Central Clearing
Chapter 14. Risks Caused by CCPs: Risks Faced by CCPs
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
John C. Hull, Risk Management and Financial Institutions, 4th edition
(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 2. Banks
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(New York: Pearson, 2017). Chapter 4. Interest Rates
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.
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2019 2020
John C. Hull, Risk Management and Financial Institutions, 4th edition
(Hoboken, New Jersey: John Wiley & Sons, 2015). Chapter 3. Insurance Companies and Pension Plans
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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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
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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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
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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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
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(New York: Pearson, 2017). Chapter 11. Properties of Stock Options
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(New York: Pearson, 2017). Chapter 12. Trading Strategies Involving Options
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
New Edition: John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(New York: Pearson, 2017). Chapter 12. Trading Strategies Involving Options
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(New York: Pearson, 2017). Chapter 4. Interest Rates
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
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.
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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
Jon Gregory, Central Counterparties: Mandatory Clearing and Bilateral Margin Requirements for OTC Derivatives
(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.
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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
Jon Gregory, Central Counterparties: Mandatory Clearing and Bilateral Margin Requirements for OTC Derivatives
(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.
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2019 2020
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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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.
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2019 2020
Linda Allen, Jacob Boudoukh and Anthony Saunders, Understanding Market, Credit and Operational Risk:
The Value at Risk Approach (Oxford: Blackwell Publishing, 2004).
Chapter 3. Putting VaR to Work
Linda Allen, Jacob Boudoukh and Anthony Saunders, Understanding Market, Credit and Operational Risk:
The Value at Risk Approach (Oxford: Blackwell Publishing, 2004).
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.
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2019 2020
Kevin Dowd, Measuring Market Risk, 2nd Edition
(West Sussex, England: John Wiley & Sons, 2005).Chapter 2. Measures of Financial Risk
Kevin Dowd, Measuring Market Risk, 2nd Edition
(West Sussex, England: John Wiley & Sons, 2005).Chapter 2. Measures of Financial Risk
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.
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2019 2020
Arnaud de Servigny and Olivier Renault, Measuring and Managing Credit Risk
(New York: McGraw-Hill, 2004).Chapter 2. External and Internal Ratings
John Hull, Options, Futures, and Other Derivatives, 9th Edition
(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.
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2019 2020
Aswath Damodaran, Country Risk: Determinants, Measures and Implications -
The 2018 Edition
John Hull, Options, Futures, and Other Derivatives, 9th 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.
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2019 2020
Gerhard Schroeck, Risk Management and Value Creation in Financial Institutions (New York: John Wiley & Sons, 2002).
John Hull, Options, Futures, and Other Derivatives, 9th Edition
(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.
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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.
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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
Bruce Tuckman, Fixed Income Securities, 3rd Edition
(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.
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2019 2020
Bruce Tuckman, Fixed Income Securities, 3rd Edition
(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 1. Prices, Discount Factors, and Arbitrage
Bruce Tuckman, Fixed Income Securities, 3rd Edition
(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.
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2019 2020
Bruce Tuckman, Fixed Income Securities, 3rd Edition
(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 2. Spot, Forward and Par Rates
Bruce Tuckman, Fixed Income Securities, 3rd Edition
(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.
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2019 2020
Bruce Tuckman, Fixed Income Securities, 3rd Edition
(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.
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2019 2020
Bruce Tuckman, Fixed Income Securities, 3rd Edition
(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.
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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.
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2019 2020
New Edition: John C. Hull, Options, Futures, and Other Derivatives, 10th Edition
(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.
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2019 2020
John Hull, Options, Futures, and Other Derivatives, 9th Edition
(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.
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2019 2020
John Hull, Options, Futures, and Other Derivatives, 9th Edition
(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.
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