FRM AIM Statements Analysis

8/10/2019 FRM AIM Statements Analysis

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Compiled by


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Section AIM Statements/Objectives Added AIM/ObjectivesFoundations of Risk Management 61 17Quantitative Analysis 81 13

Financial Market & Products 152 17Valuation & Risk Models 163 8FRM Level 1 457 55

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Weightage in exam20%20%

30%30%100%


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For more info visit http://beatthefrm.wordpre

Section Foundations of Risk Management

Weightage 20%Total AIM Statements 61Newly Added 17

Book Objectives

Risk Taking: A Corporate GovernancePerspective, (International FinanceCorporation, World Bank Group,

June 2012).

Added Objectives

Describe t

Define risk,Define risDescribe a

Describe tIdentify EDescribe hDescribe pConstruct

Identify thIdentify thCompareDefine he

Identify fiIdentify thSummarizIdentify eDescribe thCompare p


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Edwin J. Elton, Martin J. Gruber, Stephen J.Brown and William N. Goetzmann, ModernPortfolio Theory and Investment Analysis, 8th Edition (Hoboken,NJ: John Wiley & Sons, 2009).Chapter 5 ................................DelineatingEfficient Portfolios

Edwin J. Elton, Martin J. Gruber, Stephen J.Brown and William N. Goetzmann, ModernPortfolio Theory and Investment Analysis, 8th Edition (Hoboken,NJ: John Wiley & Sons, 2009).

Chapter 13...............................The StandardCapital Asset Pricing Model

Added Objectives

Calculate

Explain hoDescribe t

Define theDefine the

UnderstanDescribe tDescribe tUse the CDefine bet


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Edwin J. Elton, Martin J. Gruber, Stephen J.Brown and William N. Goetzmann, ModernPortfolio Theory and Investment Analysis, 8th Edition (Hoboken,NJ: John Wiley & Sons, 2009).Chapter 14...............................NonstandardForms of Capital Asset Pricing Models

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

John Wiley & Sons, 2003).

Chapter 4, Section 4.2 only...............................Applying the CAPM toPerformance Measurement: Single-Index Performance Measurement Indicators

Riskless le

Describe tShort sale

Personal tNonmarkeHeteroge

Non-price

Consumpt

Multi-bet

Describe t

Calculate,ComputeDefine be

CAPM incl

Explain th


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GARP Code of Conduct.

Understanding and Communicating Risk Appetite, (COSO, Dr. Larry Rittenberg andFrank Martens, January 2012).

Zvi Bodie, Alex Kane, and Alan J. Marcus,Investments, 9th Edition (New York:McGraw-Hill, 2010).Chapter 10 ...........................ArbitragePricing Theory and Multifactor Models ofRisk and Return

Construct Explain h Describe

Differenti Explain h Explain th

Describe th Calculate Describe

Explain th

Describe t

Added Readings

Describe t

Define risk

Describe Describe


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s.com/

Added/New Objective

Slight Modification

Major change/Deletio

he certainty equivalent approach to estim

identify the classifications of risks, and explai, identify the classifications of risks, and erisk profile and explain how one is create

he role of risk governance in a corporation terprise Risk Management (ERM) approac

ow the value of a risky asset or project caroblems which arise when using historicala risk-adjusted discount rate for an asset

e four steps in the AIRMIC risk managemee four risk treatment strategies a firm cannd contrast the different types of probabiging, explain the tradeoff between the co

ancial products a firm can use to reducee methods a firm can use to exploit risk b

the basic steps in building a good risk maamples of acceptable, desirable, and beste impact of leverage and taxes in the calculatiurely qualitative, semi-quantitative and purely


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nding and borrowing

he impact on the CAPM of the following: disallowed

axestable assetseous expectations

taking behavior

ion-oriented CAPM

CAPM

he following multi-period versions of CAP

compare, and evaluate the Treynor measnd interpret tracking error, the informatia and calculate the beta of a portfolio.

uding inflation

Morningstar Rating System, VaR based,


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te between base level and complex metri

ays in which a business can be negativelye most common issues which result in date key dimensions which characterize accerational data governance and differentiat

Citigroup, and Enron

motivation and mechanics of creating a

he key factors that led to and the lessons lhattan and their involvement with Drysdbody

Bank k of Switzerland (UBS)

Capital Management (LTCM)llschaft

ust rale

role of risk management and explain whyow risk management can fail

ow risk can be mismeasured. w a firm can fail to take known and unkno

importance of communication in effectivow firms can fail to correctly monitor and


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the Security Market Line for a well-diversifiew to construct a portfolio to hedge exposurehe Arbitrage Pricing Theory (APT) and the Fa

ate between risk appetite and risk tolerance,w an organization can develop, communicatee role of the Board of Directors in overseeing

e inputs, including factor betas, to a multi factthe expected return of an asset using a single-he Law of One Price and assess whether an a

role of risk metrics and describe the shor

he responsibility of each GARP member wihe potential consequences of violating the

appetite and explain the role of risk appetite i

considerations a firm must make in determinihe objective and characteristics of an effectiv


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ting value and contrast it with the use of a risk-adjusted discount rate.

2013 AIM STATEMENTS

the role played by risk in value creation.plain the role played by risk in value creation.

.hes and explain how they address risk management in an organization.

be estimated through the development of a risk-adjusted discount rate, how such a risk-adjusted discobetas and equity risk premiums as inputs into a valuation modelr project and apply that rate to estimate the value of the asset or project.

nt process and summarize the approach used in each step.use to manage its risks.listic approaches used to estimate value and contrast probabilistic approaches in general with risk-adjussts and benefits of hedging, and assess whether it is appropriate for a firm to hedge in particular cases.

r eliminate exposure to specific risks.tter than its competitors, and explain how an organization can create a culture of prudent risk-taking anagement system.practices in corporate risk governance.on of an equity beta for a firm.quantitative methods used to estimate risks and describe examples of each.


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folio of risky assets.

pected return and volatility of a portfolio of risky assets. .

on it of various assumptions concerning short sales and borrowing.

PM.

asset.tfolio.


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:

re, the Sharpe measure, and Jensens alpha.n ratio, and the Sortino ratio.

nd management related risk-adjusted return measures.


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s in creating data quality scores, and describe the three different viewpoints by which complex data me

impacted by poor quality data.a errors.

table data.e between data quality inspection and data validation.

ata quality scorecard.

earned from the following risk management case studies:le Securities

a large financial loss is not necessarily a failure of risk

n risks into account in making strategic decisions.e risk management.

manage risk on an ongoing basis.


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portfolio using a single-factor model.to multiple factors.a-French three-factor model, and explain the underlying assumptions of each.

nd explain how an organization can align its risk tolerance to its risk appetite., monitor and update its risk appetite.

an organizations risk appetite.

or model.factor and a multi-factor model.

bitrage situation exists using a multi-factor model.

tcomings of existing risk metrics.

th respect to professional integrity, ethical conduct, conflicts, of interest, confidentiality of informationGARP Code of Conduct.

corporate governance.

g its risk appetite, and explain how an organizations risk appetite can differ for various risk factors.e risk appetite statement.


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2014 AIM MODIFICATION

No changeNo changeNo change

No changeSlight Addition: Describe the stages of the ERM process and explain the risk management approaches that can beSlight modification: Although the main idea still remains the same i.e. use WACC to calculate risk-adjusted discounNo changeNo changeDeletionMajor Change: Deletion of Four steps in AIRMIC risk management process although a part of it is still covered undNo changeNo changeNo change

DeletionNo changeNo changeDeletion


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Deletion

DeletionDeletionDeletionDeletion

No changeNo changeNo changeNo changeThis is actually not an addition as it was earlier covered under Performance measures


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DeletionDeletionDeletionDeletionDeletionDeletion

DeletionDeletionDeletionDeletionDeletion

No ChangeNo ChangeNo ChangeDeletion


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No ChangeNo ChangeNo ChangeNo ChangeNo ChangeDeletion

No ChangeNo ChangeNo ChangeNo Change

No ChangeNo ChangeNo ChangeNo ChangeNo Change

No ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo Change


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No Change

No ChangeNo Change

New

NewNewNewNewNew

NewNewNewNewNewNew


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used in each stage of the process.t rate which is then applied on expected cash flows to arrive at NPV. The description of relative strengths and

r a new AIM statement as follows: Compare purely qualitative, semi-quantitative and purely quantitative metho


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For more info visit http://beatthefrm.wordpress.Section Quantitative AnalysisWeightage 20%Total AIM Statements 81

Newly Added 13

Book ObjectivesMichael Miller, Mathematics and Statistics

for Financial Risk Management (Hoboken,NJ: John Wiley & Sons, 2012).Chapter 2 ................................Probabilities

12345678

Chapter 3 ................................BasicStatistics

91011121314

15

Chapter 4 ................................Distributions

16

Describe thDescribe aDefine anCalculate

Define an

Define, calDefine, calInterpretCalculateDescribe tInterpret t

DistinguisDefine joiDefine anDescribe

Define an


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171819202122

Chapter 5 ................................HypothesisTesting and Confidence Intervals

232425262728293031

James Stock and Mark Watson,Introduction to Econometrics, Brief Edition(Boston: Pearson Education, 2008).Chapter 4 ................................LinearRegression with One Regressor

32333435363738394041

Describe aDescribe t

Define, calDefine an

Identify thDescribe a

Describe t

Describe t

Describe a

Explain hoDefine an

Define anDefine anDefine, inDescribe tDifferentiInterpret t

Define anDefine anDescribe tDescribe tSummarizDescribe tDefine anInterpret t


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Chapter 5 ................................Regressionwith a Single Regressor: Hypothesis Testsand Confidence Intervals

42434445464748

Added Objective

Chapter 6 ................................LinearRegression with Multiple Regressors

5051525354555657

Chapter 7 ................................HypothesisTests and Confidence Intervals in MultipleRegression

5859

Describe t

Define, inDistinguis

Explain thDefine, de

Describe t

Define anDefine an

Define, cal

Construct,Define an

Define anDescribe hDescribe tDefine, calExplain thExplain th

Define an


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6061626364

Added Objective

Philippe Jorion, Value-at-Risk:The NewBenchmark for Managing Financial Risk,3rd Edition.(New York: McGraw Hill, 2007).Chapter 12...............................Monte CarloMethods

666768697071727374

John Hull, Options, Futures, and OtherDerivatives, 8th Edition (New York: PearsonPrentice Hall, 2012).Chapter 22 ..............................EstimatingVolatilities and Correlations

7576777879808182

Added Objective

Describe h

Please note that GARP has discontinued th

Describe d

Define, calDescribe aDefine anDefine an

Explain ho

Describe thDescribe th Estimate Explain mExplain ho

Describe th

Describe th

Explain ho

Explain hoDescribe thDescribe aExplain ho

Describe hDescribe th

Interpret tConstruct,

Describe h


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Dessislava Pachamanova and Frank Fabozzi,Simulation and Optimization in Finance

(Hoboken, NJ: John Wiley & Sons, 2010).Chapter 4 ................................SimulationModeling

84858687888990919293

Added Readings

Describe di

Describe stDescribe qDescribe q

UnderstanDescribe thDescribe hDescribe thInterpret diDescribe th


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om/Added/New ObjectiveSlight ModificationMajor change/Deletio

e concept of probability. nd distinguish between continuous and di

distinguish between the probability denshe probability of an event given a discrete

interpret the best linear unbiased estima

culate, and interpret the mean, standardculate, and interpret the covariance and cnd calculate the variance for a portfolio ahe mean and variance of sums of larger v

he four central moments of a statistical vahe skewness and kurtosis of a statistical di

between independent and mutually exclt probability, describe a probability matricalculate a conditional probability, and di

ayes Theorem and apply this theorem in

distinguish between parametric and non


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nd apply the Central Limit Theorem and ehe properties of independent and identica

culate and interpret the mean and varianestimate the sample mean and sample v

e key properties and parameters of the Chmixture distribution and explain the crea

he properties of linear combinations of no

he key properties of the uniform distributi

nd apply the principle of Chebyshevs ineq

w regression analysis in econometrics meinterpret a population regression functio

construct a confidence interval. interpret the null hypothesis and the alte

erpret, and calculate the t-statistic. he process of selecting and constructing a

te between a one-tailed and a two-tailedhe results of hypothesis tests with a speci

interpret the stochastic error term. interpret a sample regression function, r

he key properties of a linear regression. he method and three key assumptions of

the benefits of using OLS estimators. he properties of OLS estimators and their

interpret the explained sum of squares, the results of an ordinary least squares reg


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w to simulate various distributions using the i

e use of Philippe Jorion for Monte

terministic simulations.

culate, and interpret the homoskedasticitnd interpret tests of single restrictions invinterpret confidence sets for multiple co

describe omitted variable bias in multipl

GARCH models perform in volatility forecasti

e exponentially weighted moving average (EWe generalized auto regressive conditional hetevolatility using the GARCH(p,q) modelean reversion and how it is captured in the G

the parameters of the GARCH(1,1) and the E

e bootstrap method.

e drawbacks and limitations of simulation pro

historical data and various weighting schem

simulations can be used for computing VaRe relationship between the number of Monted identify simulation acceleration techniques.

to simulate correlated random variables usin

w correlations and covariances are calculatede volatility term structure and the impact of v

he R2 and adjusted-R2 apply, and interpret hypothesis tests and

w to simulate a price path using a geometric


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fferent ways of choosing probability distributi

andards for an effective pseudorandom numbasi-random (low-discrepancy) sequences andasi-random (low-discrepancy) sequences and

and interpret the results generated by Monte advantages of simulation modeling when mw correlations can be incorporated into simule relationship between the accuracy of a simuscretization error bias and describe how to ide inverse transform method and its implemen


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2013 AIM STATEMENTS

screte random variables. ity function, the cumulative distribution function and the inverse cumulative distribution function, and c

probability function.

tor (BLUE).

eviation, and variance of a random variable.orrelation between two random variables.

d understand the derivation of the minimum variance hedge ratio.riables.

riable or distribution: mean, variance, skewness and kurtosis. stribution, and interpret the concepts of coskewness and cokurtosis.

sive events.and calculate joint probabilities using probability matrices.

stinguish between conditional and unconditional probabilities. he calculation of conditional probabilities.

arametric distributions.


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plain the conditions for the theorem.lly distributed (i.i.d.) variables.

e of the sample mean.riance.

i-squared, Students t, and F-distributions.ion and characteristics of mixture distributions.

rmally distributed variables.

on, Bernoulli distribution, Binomial distribution, Poisson distribution, normal distribution and lognormal

uality.

sures the relationship between dependent and independent variables.n, regression coefficients, parameters, slope and the intercept.

rnative hypothesis, and calculate the test statistics.

null hypothesis. test and explain the circumstances in which to use each test.ic level of confidence.

gression coefficients, parameters, slope and the intercept.

rdinary least squares (OLS) for estimation of parameters.

ampling distributions, and explain the properties of consistent estimators in general.he total sum of squares, the residual sum of squares, the standard error of the regression (SER), and theression.


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teroskedasticity.

ng omitted variable bias.

s, and alternatives to the OLS. hen the sample size is small.

est linear conditionally unbiased estimator.

n coefficients.

for regression coefficients.

d confidence intervals for a single coefficient in a multiple regression.

le regression. a multiple regression.

ltiple regression.sion model.llinearity and their implications.

nd heteroskedasticity.


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nverse transform method.

arlo simulation for the year 2014. Instead a new book "Simulation and Optimization in

-only F-statistic. olving multiple coefficients. fficients.

regressions.

ng.

MA) model for estimating volatility and its properties, and estimate volatility using the EWMA model. roscedasticity (GARCH(p,q)) model for estimating volatility and its properties:

RCH(1,1) modelMA models are estimated using maximum likelihood methods.

cedures.

s can be used in estimating volatility.

nd pricing options.Carlo replications and the standard error of the estimated values.

g Cholesky factorization.

, and explain the consistency condition for covariances. latility changes.

confidence intervals for multiple coefficients in a multiple regression.

rownian motion model.


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ns in creating simulation models.

er generator and explain midsquare technique and explain how they work in simulations. explain how they work in simulations.

Carlo simulation.ltiple input variables and compounding distributions

ation modeling.lation model and the number of scenarios run in the simulation.ntify an efficient estimator.tation in discrete and continuous distributions.


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inance" by Dessi


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No ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo Change

No ChangeNo ChangeDeletion. This however will be covered in Financial Markets and Products sectionNo ChangeNo ChangeNo Change

No Change

No Change


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No ChangeNo ChangeNo ChangeDeletion. Although it doesn't make any differenceNo ChangeNo Change

No ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo Change

No ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo ChangeNo Change


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DeletionNo ChangeNo ChangeNo ChangeNo Change

DeletionDeletionDeletionDeletionDeletionDeletionDeletionDeletionDeletion


lava Pachamanova and Frank Fabozzi is prescribed. Look for Added readings at the bott


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NewNewNewNewNewNewNewNewNewNew


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For more info visit http://beatthefrm.wordpress.Section FMPWeightage 30%Total AIM Statements 152Newly Added 17

Book ObjectivesHull, Options, Futures, and OtherDerivatives, 8th Edition.Chapter 1 .................................Introduction

1

2345678

Chapter 2 ................................Mechanics ofFutures Markets

91011121314151617

Chapter 3 ................................HedgingStrategies Using Futures

18192021

Differentiat

Describe tDifferentiCalculate

Explain thDescribe tDescribe tDescribe tIdentify aDescribe t

Describe,Describe,CalculateDescribe s

Define an

Define theDefine cro

Define anCompare

Describe tDefine an


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222324

Chapter 4 ................................InterestRates

2526272829303132

Chapter 5................................Determination ofForward and Futures Prices

3334353637

383940414243

Added Objective

Chapter 6 ................................Interest Rate

Futures45464748495051

Explain hoDescribe

CalculateCalculate

Define, co

DescribeCalculateExplain th

CalculateCalculateDescribe tCalculateDescribe t

DifferentiDefine sh

Identify thCalculateDifferentiExplain anCalculateDescribe t

CalculateDefine incCalculateDefine anDescribe tDefine coExplain thsystemati

Calculate

Describe


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5253545556

Chapter 7 ................................Swaps

5758596061626364656667686970

Added Objective

Chapter 10...............................Properties ofStock Options

7273747576

Chapter 11................................TradingStrategies Involving Options

7778798081

Describe tDescribe tCalculateCalculateExplain thDescribe t

Explain th

Explain thExplain hoExplain th

CalculateDescribe aExplain hoCalculate

Explain theDescribe a

Explain th

Identify an

Explain hoCalculateCalculateDescribe t

Explain ho

Calculate tDescribe aCompute t

Explain th

Identify thIdentify, iExplain pu


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Robert McDonald, Derivatives Markets, 3rdEdition (Boston: Addison-Wesley, 2013).

8283

84858687888990919293

94

Helyette Geman, Commodities and CommodityDerivatives: Modeling and Pricing for

Agriculturals, Metals and Energy (West Sussex, England: John Wiley &Sons, 2005).Chapter 1 .................................Fundamentalsof Commodity Spot and Futures Markets:Instruments, Exchangesand Strategies

9596979899

100101102103

104

Describe thDescribe aDescribe thDefine basi

Define billDefine theDifferentiat

Describe aDefine the l

Evaluate thDescribe ex

Explain ho

Define and

Define carrCompute tCompare tIdentify fac

Define comExplain the

Explain ho

Describe v

Identify a cDefine and


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John B. Caouette, Edward I. Altman, PaulNarayanan, and Robert W.J. Nimmo,Managing Credit Risk, 2nd Edition(New York: John Wiley & Sons, 2008).Chapter 6 ................................The Rating

Agencies

131132133134135136137138139

The Institute for Financial Markets, Futures andOptions (Washington, DC: The Institute forFinancial Markets, 2011).Chapter 1 .................................Introduction:Futures and Options Markets

140141142143144

Chapter 2 ................................Futures IndustryInstitutions and Professionals

145146147148149150

Describe thDescribe so

Added Readings

Describe thDescribe thDifferentiatDefine and

Describe thExplain maDescribe aDescribe StDescribe thDescribe aDescribe th

Describe thDescribe th

Explain the

Describe thExplain theDescribe exExplain ori


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151

Chapter 7 ................................Hedging withFutures and Options

152153154

Explain the

Define theExplain excDescribe a


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om/Added/New ObjectiveSlight ModificationMajor change/Deletio

e between an open outcry system and electro

he over-the-counter market, how it differste between options, forwards, and futurend identify option and forward contract p

convergence of futures and spot prices. he rationale for margin requirements and

he role of a clearinghouse in futures trans he role of collateralization in the over-the-

d describe the differences between a norhe mechanics of the delivery process and

ontrast, and calculate the payoffs from hontrast, and calculate the payoffs from spn arbitrage payoff and describe how arbit

ome of the risks that can arise from the us

describe the key features of a futures co

basis and the various sources of basis riskss hedging, and compute and interpret th

demonstrate an understanding of the imnd contrast forward and futures contract

he arguments for and against hedging anddifferentiate between short and long he


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w to use stock index futures contracts to chat is meant by rolling the hedge forwar

he value of an investment using daily, wehe theoretical price of a coupon paying b

mpute, and interpret the optimal number

he differences between forward and futuhe forward price, given the underlying assrelationship between forward and futur

orward interest rates from a set of spot ra he value of the cash flows from a forwardhe limitations of duration and how convexhe change in a bonds price given duratiohe major theories of the term structure of

te between investment and consumptionrt-selling and short squeeze.

e most commonly used day count convenhe conversion of a discount rate to a pricte between the clean and dirty price for a

d calculate a U.S. Treasury bond futures che cost of delivering a bond into a Treasuhe impact of the level and shape of the yie

forward foreign exchange rate using theome, storage costs, and convenience yield

he futures price on commodities incorporcalculate, using the cost-of-carry model,

he various delivery options available in thtango and backwardation, interpret the erelationship between current futures priand nonsystematic risk.

he theoretical futures price for a Treasury

reasury Rates, LIBOR, Repo Rates, and wh


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he role of the confirmation in a swap tran he comparative advantage argument for t

he value of a plain vanilla interest rate swhe value of a plain vanilla interest rate swmechanics of a currency swap and comp

he comparative advantage argument for t

limitations of using a duration-based hed

mechanics of a plain vanilla interest ratew a plain vanilla interest rate swap can be

role of financial intermediaries in the sw

he final contract price on a Eurodollar futnd compute the Eurodollar futures contraw Eurodollar futures can be used to extenhe duration-based hedge ratio and descri

motivation to initiate a covered call or a protd explain the use and payoff functions of spre

effects of dividends on the put-call parit

describe other types of swaps, including com

w a currency swap can be used to transforhe value of a currency swap based on twohe value of a currency swap based on a sehe role of credit risk inherent in an existin

the discount rates in a plain vanilla interest r

e payoffs of various spread strategies. d explain the use and payoff functions of com

e payoffs of combination strategies.

early exercise features of American call a

e six factors that affect an options price aterpret and compute upper and lower bot-call parity and calculate, using the put-c


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e basic characteristics and differences betweearbitrage portfolio and explain the conditio

e structure of the futures market. s risk and the variance of the basis.

of lading. major risks involved with commodity spot tra

e between ordinary and extraordinary transp

arbitrage transaction in commodity forwardslease rate and explain how it determines the n

e differences between a strip hedge and a staamples of cross-hedging, specifically the proc

to create a synthetic commodity position, an

compute a commodity spread.

y markets, and explain the impact of storage ce forward price of a commodity with storagee lease rate with the convenience yield.

tors that impact gold, corn, electricity, natural

modity terminology such as storage costs, carbasic equilibrium formula for pricing commod

basis risk can occur when hedging commodit

lume and open interest and how they relate t

ommonly used measure for determining the edifferentiate between an Exchange for Physic


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financial institutions overall foreign exchangea financial institution could alter its net posit

financial institutions potential dollar gain or ldescribe the different types of foreign exchasources of foreign exchange trading gains ane potential gain or loss from a foreign currennce-sheet hedging with forwards.

trust bondst trust certificates

e bonds (including subordinated and convertied bonds

e mechanisms by which corporate bonds can

w a non-arbitrage assumption in the foreign

diversification in multicurrency asset-liabilitye relationship between nominal and real inter

bond indenture and explain the role of the cor

nds maturity date and how it impacts bond r e main types of interest payment classificatio ro-coupon bonds, the relationship between o

differentiate between an issuer default rate avery rates and describe the relationship betw

e various security types relevant for corporat

d differentiate between credit default risk anent risk and explain what may cause it in corp-yield bonds, and describe types of high-yield

bonds


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e relationship between the rating agencies anme of the trends and issues emerging from th

e risks in the commodities business that are ae key features and terms of a futures contracte between equity securities and futures contr

interpret volume and open interest.

e role of rating agencies in the financial mark ket and regulatory forces that have played a r

rating scale, define credit outlooks, and explaiandard and Poors and Moodys rating scalese difference between an issuer-pay and a subd contrast the process for rating industrial ane ratings performance for corporate bonds.

e steps that are taken when a clearinghousee mechanics of futures delivery and the roles

requisites for a successful futures market.

e features of a modern futures exchange and iorganization and administration of an exchanchange membership, the different types of exinal and variation margin, daily settlement, th


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2013 AIM STATEMENTS

nic trading.

from trading on an exchange, and its advantages and disadvantages.s contracts.

ayoffs.

explain how they work.ctions.counter market and compare it to the margining system.

al and inverted futures market. ontrast it with cash settlement.

dging strategies involving forward contracts and options.eculative strategies involving futures and options.rage opportunities are ephemeral.e of derivatives.

tract, including the asset, the contract price and size, delivery and limits.

, and explain how basis risks arise when hedging with futures. minimum variance hedge ratio and hedge effectiveness.

pact of different order types, including: market, limit, stop-loss, stop-limit, market-if-touched, discretion.

the potential impact of hedging on firm profitability.ges and identify appropriate uses.


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hange a stock portfolios beta.d and describe some of the risks that arise from such a strategy.

kly, monthly, quarterly, semiannual, annual, and continuous compounding. Convert rates based on diffend using spot rates.

of futures contracts needed to hedge an exposure, and explain and calculate the tailing the hedge adj

es contracts and explain the relationship between forward and spot prices. ets price, with or without short sales and/or consideration to the income or yield of the underlying asse

s prices.

tes.rate agreement (FRA).ity addresses some of them., convexity, and a change in interest rates.

interest rates.

assets.

ions, describe the markets that each one is typically used in, and apply each to an interest calculation.for a U.S. Treasury bill.

U.S. Treasury bond; calculate the accrued interest and dirty price on a U.S. Treasury bond.ntract conversion factor.y bond futures contract.ld curve on the cheapest-to-deliver bond decision.

nterest rate parity relationship. .

ting income/storage costs and/or convenience yields.orward prices where the underlying asset either does or does not have interim cash flows.futures markets and how they can influence futures prices.fect contango or backwardation may have on the relationship between commodity futures and spot pries and expected future spot prices, including the impact of

bond futures contract.

t is meant by the risk-free rate.


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action. e existence of interest rate swaps and explain some of the criticisms of this argument.

p based on two simultaneous bond positions.p from a sequence of forward rate agreements (FRAs).te its cash flows.

e existence of currency swaps.

ging strategy.

swap and compute its cash flows.used to transform an asset or a liability and calculate the resulting cash flows.ps market.

res contract.ct convexity adjustment.d the LIBOR zero curve.e a duration-based hedging strategy using interest rate futures.

ctive put strategy.ad strategies, including bull spread, bear spread, box spread, calendar spread, butterfly spread, and diagonal spre

, the bounds of put and call option prices, and the early exercise feature of American options.

modity, volatility and exotic swaps.

m an asset or liability and calculate the resulting cash flows.simultaneous bond positions.quence of FRAs.swap position.

ate swap are computed

bination strategies, including straddles, strangles, strips, and straps.

nd put options on a non-dividend-paying stock and the price effect early exercise may have.

nd describe how these six factors affect the price for both European and American options.nds for option prices.

ll parity on a non-dividend-paying stock, the value of aEuropean and American option, respectively.


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n hedgers, speculators, and arbitrageurs.ns for a market to be arbitrage-free.

sactions.rtation risks.

, and compute the potential arbitrage profit. o-arbitrage values for commodity forwards and futures.

k hedge and explain how these differences impact risk management.ss of hedging jet fuel with crude oil and using weather derivatives.

d use it to explain the relationship between the forward price and the expected future spot price.

osts and convenience yields on commodity forward prices and no-arbitrage bounds.costs.

gas, and oil forward prices.

ry markets, lease rate, and convenience yield.ity forwards.

y price exposure.

o liquidity and market depth.

ffectiveness of hedging a spot position with a futures contract, and compute and compare the effectiveness ofl agreement and an Alternative Delivery Procedure.


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exposure.ion exposure to reduce foreign exchange risk.ss exposure to a particular currency.ge trading activities.losses.

y denominated investment.

le debentures)

e retired before maturity, including call provisions, sinking-fund provisions, maintenance and replacement funds,

xchange markets leads to the interest rate parity theorem, and use this theorem to calculate forward foreign

positions could reduce portfolio risk.est rates.

porate trustee in a bond indenture.

etirements.s.

iginal-issue-discount and reinvestment risk, and the treatment of zeroes in bankruptcy.

d a dollar default rate. en recovery rates and seniority.

bonds, including:

credit spread risk.orate bonds.bond issuers and some of the payment features peculiar to high yield bonds.


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d regulators and identify key regulations that impact the rating agencies and the use of ratings in the market.e current credit crisis relevant to the rating agencies and the use of ratings in the market.

dressed by the use of futures contracts..

acts.

ts.ole in the growth of the rating agencies.

the difference between solicited and unsolicited ratings.nd distinguish between investment and noninvestment grade ratings.criber-pay model and describe concerns regarding the issuer-pay model.

sovereign debt and describe how the distributions of these ratings may differ.

ember is unable to meet its financial obligations on its open contracts.f the clearinghouse, buyers, and sellers in this process.

identify typical contract terms and trading rules.e and clearinghouse.

change members, and the exchange rules for member trading. e guaranty deposit, and the clearing process.


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cing brokers, account executives, commodity trading advisors, commodity pool operators, and customers.

role in the energy and financial futures markets.s for hedging with options on futures.


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For more info visit http://beatthefrm.wordpress.Section VaRWeightage 30%Total AIM Statements 163Newly Added 8

Book ObjectivesLinda Allen, Jacob Boudoukh and AnthonySaunders, Understanding Market, Creditand Operational Risk:The Value at Risk Approach (Oxford:Blackwell Publishing, 2004).Chapter 2 ................................QuantifyingVolatility in VaR Models

123456

789

101112131415

Chapter 3 ................................Putting VaRto Work 16171819202122

Explain theCompare, c

Historical Exponent

Explain and

Explain hoExplain potDistinguishDescribe th

Explain hoDescribe thDescribe thExplain theCompare dExplain stru

GARCH a Historic si Multivari Hybrid mExplain theDescribe imExplain lon


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2324

Hull, Options, Futures, and OtherDerivatives, 8th Edition.Chapter 12...............................Binomial

Trees

2526272829

Chapter 14...............................The Black-Scholes-Merton Model

303132333435363738

Chapter 18...............................The GreekLetters

3940414243

444546474849

Calculate tCalculate tDescribe hDescribe hExplain ho

Compute tIdentify theDefine implExplain hoCompute tUse Blacks

Explain theCompute tList and de

Define theDefine andExplain hoDescribe thDescribe h

Describe aExplain hoDescribe dCompute dDescribe th

Describe h

Describe thDescribe w


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747576777879

808182

Chapter 5 ................................Multi-FactorRisk Metrics and Hedges

8384

85868788899091

Chapter 6 ................................Empirical Approaches to Risk Metrics and Hedging

92939495969798

Caouette, Altman, Narayanan, and Nimmo,Managing Credit Risk, 2nd Edition. (NewYork: John Wiley & Sons, 2008).Chapter 23 ..............................Country RiskModels

99

Describe aDefine andCalculate tDefine, coCompare aDefine, co

Describe thCalculate tDescribe thConstruct a

Explain theExplain theConstruct a

Describe aDefine key

Explain ho

Define and

Calculate tCalculate tCompare aDescribe pr

Explain theDescribe aCalculate t

Describe kDefine, cal


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100101102103104105

Arnaud de Servigny and Olivier Renault,Measuring and Managing Credit Risk (NewYork: McGraw-Hill, 2004).Chapter 2 ................................External andInternal Ratings

106107

108109110111112113

Michael Ong, Internal Credit Risk Models:Capital Allocation and PerformanceMeasurement

(London: Risk Books, 2003).Chapter 4 ................................LoanPortfolios and Expected Loss

114115116117118119

120121122123124

Describe exDescribe th

Review theCompare eExplain and

Describe coIdentify anCompare aExplain appDescribe hDescribe so

Define, calDistinguish

Describe th

Explain hoDistinguish

Define andDescribe thIdentify an

Define exp

Explain h Explain hDefine usaExplain theDescribe th


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Chapter 5 ................................UnexpectedLoss

125

126127128

Kevin Dowd, Measuring Market Risk, 2ndEdition (West Sussex, England: John Wiley& Sons, 2005).Chapter 2 ................................Measures ofFinancial Risk

129130131132133134135136

John Hull, Risk Management and FinancialInstitutions, 3rd Edition (Boston: PearsonPrentice Hall, 2012).Chapter 20 ...............................OperationalRisk

137138139

140141142143144145

Explain the

Describe faDefine, calExplain the

Calculate t

Please note here that the John Hull versio

Explain theExplain ho

Describe th

Explain whExplain andDescribe spDescribe h

Describe thExplain theDefine theDefine the

Describe hDescribe hDescribe thExplain hoExplain the


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Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition.Chapter 14...............................StressTesting

146147148149150151152153154

Principles for Sound Stress TestingPractices and Supervision (BaselCommittee on Banking SupervisionPublication, May 2009).

155156

157158159160161162163164

Describe thContrast bIdentify coDescribe thDescribe thExplain the

The use o Stress tes Stress tes Stress tesDescribe st Use of str

Compare aDefine andExplain ho

Describe thDescribe w

Stress tes Principles

Added Readings


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Daniel Wagner, Managing Country Risk: APractitioners Guide to Effective Cross-Border Risk Analysis(Boca Raton, FL: Taylor & Francis Group,2012).Chapter 3 ................................AssessingCountry Risk

165166167168

Chapter 4 ................................Country Risk Assessment in Practice

169170171172

Describe qDescribe al

Explain keyDescribe a

Describe faApply basic

Identify chIdentify ke


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om/Added/New ObjectiveSlight ModificationMajor change/Deletion

various approaches for estimating VaR. ontrast and calculate parametric and non-paramet

standard deviationial smoothing

give examples of linear and non-linear derivatives.

asset return distributions tend to deviate from thential reasons for the existence of fat tails in a retubetween conditional and unconditional distributio

e implications of regime switching on quantifying v

to calculate VaR for linear derivatives. e delta-normal approach to calculating VaR for no

e limitations of the delta-normal method. full revaluation method for computing VaR.

elta-normal and full revaluation approaches. ctural Monte Carlo, stress testing and scenario an

proachimulationte density estimation

ethods process of return aggregation in the context of vol

plied volatility as a predictor of future volatility anhorizon volatility/VaR and the process of mean re


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e value of a European call or put option using thee value of an American call or put option using a tw volatility is captured in the binomial model.

w the binomial model value converges as time pethe binomial model can be altered to price optio

e value of a European option using the Black-Schocomplications involving the valuation of warrants.

lied volatilities and describe how to compute implidividends affect the early decision for American c

e value of a European option using the Black-SchoApproximation to compute the value of an Americ

lognormal property of stock prices, the distributioe realized return and historical volatility of a stockcribe the assumptions underlying the Black-Schole

delta of a portfolio. describe theta, gamma, vega, and rho for option p to implement and maintain a gamma neutral posi

e relationship between delta, theta, and gamma. w hedging activities take place in practice, and de

d assess the risks associated with naked and covernaked and covered option positions generate a st

lta hedging for an option, forward, and futures co elta for an option. e dynamic aspects of delta hedging.

w portfolio insurance can be created through opti

e implications of correlation breakdown for scenarorst-case scenario (WCS) analysis and compare WC


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e common day-count conventions used in bond pri

d describe the impact of different compounding fiscount factors given interest rate swap rates.

ot rates given discount factors.

ount factor and use a discount function to computlaw of one price, explain it using an arbitrage arg

components of a U.S. Treasury coupon bond, andreplicating portfolio using multiple fixed income sitrage opportunities for fixed income securities wite between clean and dirty bond pricing and ex

between gross and net realized returns, and calculinterpret the spread of a bond, and explain how arpret, and apply a bonds yield-to-maturity (YTM) t

interpret the forward rate, and compute forward rrate and describe the equation for the par rate of ae relationship between spot, forward and par rate

impact of maturity on the price of a bond and the rflattening and steepening of rate curves and c

bond's YTM given a bond structure and price. e price of an annuity and a perpetuity.

relationship between spot rates and YTM.

coupon effect and explain the relationship betweedecomposition of P&L for a bond into separate facmost common assumptions in carry roll-down sce


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interest rate factor and identify common examplcompute the DV01 of a fixed income security givee face amount of bonds required to hedge an optipute, and interpret the effective duration of a fixed contrast DV01 and effective duration as measurpute, and interpret the convexity of a fixed incom

e key rate exposure technique in multi-factor hede key rate exposures for a given security, and come relationship between key rates, partial '01s and fn appropriate hedge for a position across its entire

process of calculating the effective duration and cimpact of negative convexity on the hedging of fixbarbell portfolio to match the cost and duration o

d assess the major weakness attributable to singlerate exposures and know the characteristics of key

key rate and multi-factor analysis may be applied

differentiate between country risk and transfer ris

e face value of an offsetting position needed to cae face value of multiple offsetting swap positionsd contrast between level and change regressions.

incipal component analysis and explain how it is a

drawbacks to using a DV01-neutral hedge for a boregression hedge and explain how it improves on ae regression hedge adjustment factor, beta.

y-rate shift analysis. ulate, and interpret key rate 01 and key rate dura


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ternal rating scales, the rating process, and the line impact of time horizon, economic cycle, industry

results and explanation of the impact of ratings chxternal and internal ratings approaches.

compare the through-the-cycle and at-the-point i

untry risk in a historical context. describe some of the major risk factors that are r

d contrast corporate and sovereign historical defaroaches for and challenges in assessing country ris

w country risk ratings are used in lending and inveme of the challenges in country risk analysis.

ulate and interpret the expected loss for an individbetween loan and bond portfolios.

e objectives of measuring credit risk for a banks lo

a credit downgrade or loan default affects the retbetween expected and unexpected loss.

explain a ratings transition matrix and its elements e process for and issues with building, calibrating a

describe the biases that may affect a rating syste

sures, adjusted exposures, commitments, covena

w drawn and undrawn portions of a commitmentw covenants impact exposures

e given default and how it impacts expected and uconcept of credit optionality.

e process of parameterizing credit risk models and


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objective for quantifying both expected and unexp

ctors contributing to expected and unexpected los ulate and interpret the unexpected loss of an asse relationship between economic capital, expected l

e regulatory capital using the basic indicator appr

3is being used for 2014 as compared t

Basel Committees requirements for the advancedto get a loss distribution from the loss frequency

e common data issues that can introduce inaccura

VaR is not a coherent risk measure. calculate expected shortfall (ES), and compare an

ectral risk measures, and explain how VaR and ESw the results of scenario analysis can be interpret

e mean-variance framework and the efficient front limitations of the mean-variance framework with

alue-at-Risk (VaR) measure of risk, describe assuproperties of a coherent risk measure and explain t

w to use scenario analysis in instances when therew to identify causal relationships and how to use re allocation of operational risk capital and the use

to use the power law to measure operational risk risks of moral hazard and adverse selection when


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e purposes of stress testing and the process of imptween event-driven scenarios and portfolio-drivenmon one-variable sensitivity tests.

e Standard Portfolio Analysis of Risk (SPAN) systee drawbacks to scenario analysis.

difference between unidimensional and multidim

f stress testing and integration in risk governanceting methodologiesting scenariosting handling of specific risks and products.

ress testing principles for banks within:ess testing and integration in risk governance

d contrast various approaches to scenario analysi distinguish between sensitivity analysis and stress

the results of a stress test can be used to improv

e rationale for the use of stress testing as a risk maeaknesses identified and recommendations for im

ting methodology and scenario selectionfor supervisors


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alitative and quantitative factors that can be usedernative measures and indices that can be useful i

considerations when developing and using analytiprocess for generating a ranking system and selecti

ctors which are likely to influence the political stabcountry risk analysis in comparing two countries a

racteristics and guidelines leading to effective couindicators used by rating agencies to analyze a co


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ric approaches for estimating conditional volatility, including:

.

2013 AIM STATEMENTS

e normal distribution.rn distribution and describe the implications fat tails have on analysis of return distributions.ns.

olatility.

-linear derivatives.

lysis methods for computing VaR, identifying strengths and weaknesses of each approach.

atility forecasting methods. d its shortcomings.

version according to an AR(1) model.


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ne-step and two-step binomial model.o-step binomial model.

iods are added.s on: stocks with dividends, stock indices, currencies, and futures.

les-Merton model on a non dividend paying stock.

d volatilities from market prices of options using the Black-Scholes-Merton model. all and put options.

les-Merton model on a dividend paying stock.an call option on a dividend-paying stock.

of rates of return, and the calculation of expected return..s-Merton option pricing model.

ositions. ition.

cribe how scenario analysis can be used to formulate expected gains and losses with option positions.

ed option positions. op loss trading strategy.

tracts.

on instruments and stock index futures.

io analysis. S to VaR.


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icing.

equencies on a bonds value.

present and future values. ument, and describe how it can be applied to bond pricing.

compare and contrast the structure to Treasury STRIPS, including the difference between P-STRIPS and C-STRIPScurities to match the cash flows of a given fixed income security.

h certain cash flows.plain the implications of accrued interest with respect to bond pricing.

ate the realized return for a bond over a holding period including reinvestments.spread is derived from a bond price and a term structure of rates.o bond pricing.

ates given spot rates.bond.

s.eturns generated by bonds.nstruct a hypothetical trade to reflect expectations that a curve will flatten or steepen.

coupon rate, YTM, and bond prices. tors including carry roll-down, rate change and spread change effects. narios, including realized forwards, unchanged term structure, and unchanged yields


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s of interest rate factors. a change in yield and the resulting change in price.

on position given the DV01 of each.d income security given a change in yield and the resulting change in price.es of price sensitivity.e security given a change in yield and the resulting change in price.

ing applications and summarize its advantages and disadvantages.pute the appropriate hedging positions given a specific key rate exposure profile.orward-bucket 01s, and calculate the forward-bucket 01 for a shift in rates in one or more buckets.range of forward bucket exposures.

nvexity of a portfolio of fixed income securities. d income securities.

f a given bullet investment, and explain the advantages and disadvantages of bullet versus barbell portfolios.

-factor approaches when hedging portfolios or implementing asset liability techniques.rate exposure factors including partial 01s and forward-bucket 01s.

in estimating portfolio volatility.

and describe some of the factors that might lead to each.

rry out a regression hedge.eeded to carry out a two-variable regression hedge.

plied in constructing a hedging portfolio.

d position. standard DV01-neutral hedge.

ion.


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between ratings and default., and geography on external ratings.

anges on bond and stock prices.

ternal ratings approaches.

levant for sovereign risk analysis. ult rate patterns.

.stment decisions.

ual credit instrument.an portfolio.

urn of a loan.

. nd backtesting an internal rating system.

.

ts, and outstandings:

affect exposure

nexpected loss.

its challenges.


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ected loss.

..oss and unexpected loss.

ach and the standardised approach.

o 2nd version in 2013. Chapter 20 in 3rd version corresponds to Chapter 18 in 2nd Versi

measurement approach (AMA) and their seven categories of operational risk.distribution and the loss severity distribution using Monte Carlo simulations.

ies and biases in the estimation of loss frequencyand severity distributions.

contrast VaR and ES.re special cases of spectral risk measures.d as coherent risk measures.

ier. espect to assumptions about the return distributions. ptions about return distributions and holding period, and explain the limitations of VaR.

he meaning of each property.

is scarce data.isk and control self assessment (RCSA) and key risk indicators (KRIs) to measure and manage operational risks.of scorecards.

.sing insurance to mitigate operational risks.


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lementing a stress testing scenario. scenarios.

m for measuring portfolio risk.

nsional scenarios..

testing model parameters.our risk analysis and risk management systems.

nagement tool.rovement in:


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to assess country risk.n assessing country risk.

al tools to assess country risk.ng risk management tools to compare the risk among countries.

ility and economic openness within a country. s illustrated in the case study.

ntry risk analysis. ntrys debt and political risk, and describe challenges faced by country risk analysts in using external agency ratin


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FRM AIM Statements Analysis