frm study guide changes 2015

FRM ExamStudy GuideChanges2014-2015

2015

FRM Exam Study Guide Changes 2014-2015

2015 Global Association of Risk Professionals. All rights reserved. 1

FRM EXAM PART I CHANGES

FOUNDATIONS OF RISK MANAGEMENT

Additions1. 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 (Appendix 1.1. Typology of Risk Exposures)

Chapter 2. Corporate Risk Management: A Primer

Chapter 4. Corporate Governance and Risk Management

2. James Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition(Hoboken, NJ: John Wiley & Sons, 2014). Chapter 4. What is ERM?

3. Implementing Robust Risk Appetite Frameworks to Strengthen Financial Institutions, Institute of International Finance, June 2011.

4. John Hull, Risk Management and Financial Institutions, 3rd Edition (New York: John Wiley & Sons, 2012). Chapter 6. The Credit Crisis of 2007

5. Principles for Eective Data Aggregation and Risk Reporting, (Basel Committee on Banking Supervision Publication, January 2013).

Deletions1. Risk Taking: A Corporate Governance Perspective, (International Finance Corporation, World Bank Group, June 2012).2. Understanding and Communicating Risk Appetite, (COSO, written by Dr. Larry Rittenberg and Frank Martens,

January 2012).

Updates1. 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). Now using 9th Edition, 2014. Chapter 13. The Standard Capital Asset Pricing Model

2. Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 10th Edition (New York: McGraw-Hill, 2013). Now using 10th Edition, 2013. Chapter 10. Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Knowledge Point ChangesThe knowledge points are unchanged but have been reordered as follows: Basic risk types, measurement and management tools

Creating value with risk management

The role of risk management in corporate governance

Enterprise Risk Management (ERM)

Financial disasters and risk management failures

The Capital Asset Pricing Model (CAPM)

Risk-adjusted performance measurement

Multi-factor models

Information risk and data quality management

Ethics and the GARP Code of Conduct

2 2015 Global Association of Risk Professionals. All rights reserved.


QUANTITATIVE ANALYSIS

Additions1. John Hull, Risk Management and Financial Institutions, 3rd Edition (Boston: Pearson Prentice Hall, 2012).

Chapter 11. Correlation and Copulas

2. Francis X. Diebold, Elements of Forecasting, 4th Edition (Mason, Ohio: Cengage Learning, 2006). Chapter 5. Modeling and Forecasting Trend (Section 5.4 onlySelecting Forecasting Models Using the Akaike and

Schwarz Criteria)

Chapter 7. Characterizing Cycles

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

DeletionsNone

Updates1. Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition

(Hoboken, NJ: John Wiley & Sons, 2013). Now using 2nd Edition, 2013. Chapter 2. Probabilities

Chapter 3. Basic Statistics

Chapter 4. Distributions

Chapter 6. Bayesian Analysis (New Reading) (Pages 113-124 only)

Chapter 7. Hypothesis Testing and Confidence Intervals

2. John Hull, Options, Futures, and Other Derivatives, 9th Edition (New York: Pearson Prentice Hall, 2014). Now using 9th Edition, 2014. Chapter 23. Estimating Volatilities and Correlations for Risk Management

Knowledge Point ChangesKnowledge points have been reordered and modied as follows: Discrete and continuous probability distributions

Estimating the parameters of distributions

Population and sample statistics

Bayesian analysis (NewReflects added reading)

Statistical inference and hypothesis testing

Correlations and copulas (NewReflects added reading)

Estimating correlation and volatility using EWMA and GARCH models

Volatility term structures

Linear regression with single and multiple regressors (Subpoints have been deleted)

Time series analysis

Simulation methods



FINANCIAL MARKETS AND PRODUCTS

Additions1. John Hull, Options, Futures, and Other Derivatives, 9th Edition.

Chapter 10. Mechanics of Options Markets

Chapter 26. Exotic Options

2. Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Todays Markets, 3rd Edition (New York: Wiley, 2011) Chapter 20. Mortgages and Mortgage-Backed Securities

Deletions1. Helyette Geman, Commodities and Commodity Derivatives: Modeling and Pricing for Agriculturals, Metals and Energy

(West Sussex, England: John Wiley & Sons, 2005). Chapter 1. Fundamentals of Commodity Spot and Futures Markets: Instruments, Exchanges and Strategies

Updates1. John Hull, Options, Futures, and Other Derivatives, 9th Edition. Now using 9th Edition, 2014.

Chapter 1. Introduction

Chapter 2. Mechanics of Futures Markets

Chapter 3. Hedging Strategies Using Futures

Chapter 4. Interest Rates

Chapter 5. Determination of Forward and Futures Prices

Chapter 6. Interest Rate Futures

Chapter 7. Swaps

Chapter 11. Properties of Stock Options

Chapter 12. Trading Strategies Involving Options

2. Anthony Saunders and Marcia Millon Cornett, Financial Institutions Management: A Risk Management Approach, 8th Edition (New York: McGraw-Hill, 2014). Now using 8th Edition, 2014. Chapter 13. Foreign Exchange Risk

Knowledge Point ChangesKnowledge points have been consolidated and modied as follows: Structure and mechanics of OTC and exchange markets

Structure, mechanics, and valuation of forwards, futures, swaps and options (Subpoints consolidated)

Hedging with derivatives

Interest rates and measures of interest rate sensitivity

Foreign exchange risk

Corporate bonds

Mortgage-backed securities (NewMoved from Part IIMarket Risk Measurement)

Rating agencies



VALUATION AND RISK MODELS

Additions1. Gerhard Schroeck, Risk Management and Value Creation in Financial Institutions (New York: Wiley, 2002).

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

Deletions1. Michael Ong, Internal Credit Risk Models: Capital Allocation and Performance Measurement

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

Chapter 5. Unexpected Loss

2. Bruce Tuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011). Chapter 6. Empirical Approaches to Risk Metrics and Hedges (Moved to Part IIMarket Risk)

Updates1. John Hull, Options, Futures, and Other Derivatives, 9th Edition. Now using 9th Edition, 2014

Chapter 13. Binomial Trees

Chapter 15. The Black-Scholes-Merton Model

Chapter 19. The Greek Letters

Knowledge Point ChangesKnowledge points have been consolidated and expanded and reordered as follows: Value-at-Risk (VaR) (Subpoints deleted)

Expected shortfall (New Knowledge point)

Stress testing and scenario analysis

Option valuation (Subpoints deleted)

Fixed income valuation (Subpoints deleted)

Country and sovereign risk models and management

External and internal credit ratings

Expected and unexpected losses

Operational risk



FRM EXAM PART II CHANGES

MARKET RISK MEASUREMENT AND MANAGEMENT

Additions1. Gunter Meissner, Correlation Risk Modeling and Management (New York: Wiley, 2014).

Chapter 1. Some Correlation Basics: Properties, Motivation, Terminology

Chapter 2. Empirical Properties of Correlation: How Do Correlations Behave in the Real World?

Chapter 3. Statistical Correlation ModelsCan We Apply Them to Finance?

Chapter 4. Financial Correlation ModelingBottom-Up Approaches (Sections 4.3.0 (intro), 4.3.1, and 4.3.2 only)

2. Bruce Tuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011). Chapter 6. Empirical Approaches to Risk Metrics and Hedges (Moved from Part IValuation)

3. John Hull, Options, Futures, and Other Derivatives, 9th Edition. Chapter 9. OIS Discounting, Credit Issues, and Funding Costs

Deletions1. Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: John Wiley & Sons, 2005).

Chapter 5. AppendixModeling Dependence: Correlations and Copulas

2. Jacob Boudoukh, Matthew Richardson and Robert F. Whitelaw, The Best of Both Worlds: A Hybrid Approach to Calculating Value at Risk, Stern School of Business, NYU.

3. John Hull and Alan White, Incorporating Volatility Updating into the Historical Simulation Method for Value at Risk, Journal of Risk, October 1998.

4. John Hull and Alan White, LIBOR vs. OIS: The Derivatives Discounting Dilemma, April 2013. Forthcoming in the Journal of Investment Management.

5. John Hull, Options, Futures, and Other Derivatives, 8th Edition. Chapter 25. Exotic Options

6. Pietro Veronesi, Fixed Income Securities (Hoboken, NJ: John Wiley & Sons, 2010). Chapter 8. Basics of Residential Mortgage Backed Securities

7. Frank Fabozzi, Anand Bhattacharya, William Berliner, Mortgage-Backed Securities, 3rd Edition(Hoboken, NJ: John Wiley & Sons, 2011). Chapter 1. Overview of Mortgages and the Consumer Mortgage Market

Chapter 2. Overview of the Mortgage-Backed Securities Market

Chapter 10. Techniques for Valuing MBS

Updates1. John Hull, Options, Futures, and Other Derivatives, 8th Edition. Now using 9th Edition, 2014.

Chapter 20. Volatility Smiles

Knowledge Point Changes Exotic Options has been deleted.

Mortgages and Mortgage-backed securities (MBS) along with the subpoint of Structure, markets and valuation

have been consolidated and moved to FRM Exam Part I.



CREDIT RISK MEASUREMENT AND MANAGEMENT

The changes in this section reflect an update to the 2nd Edition of the Jon Gregory book, as well as the chapter on wrong-

way risk being re-added to the curriculum.

AdditionsNone

DeletionsNone

Updates1. Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 2011).

Chapter 8. Only Sections 8.1, 8.2 and 8.3 will be covered.

Knowledge Point ChangesThe knowledge points have been consolidated to the following: Credit analysis

Default risk: Quantitative methodologies (Risk neutral valuations has been deleted)

Expected and unexpected loss

Credit VaR

Counterparty risk (Subpoints deleted)

Credit derivatives (Subpoints deleted)

Structured finance and securitization (Subpoints deleted)



OPERATIONAL AND INTEGRATED RISK MANAGEMENT

Additions1. Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Todays Markets, 3rd Edition (New York: Wiley, 2011).

Chapter 12. Repurchase Agreements and Financing

2. Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice, Board of Governors of the Federal Reserve System, August 2013 (Moved from 2014 Current Issue readings).

3. John Hull, Risk Management and Financial Institutions, 3rd Edition (New York: John Wiley & Sons, 2012). Chapter 12. Basel I, Basel II and Solvency II

Chapter 13. Basel 2.5, Basel III, and Dodd-Frank

Deletions1. Mo Chaudhury, A Review of the Key Issues in Operational Risk Capital Modeling, The Journal of Operational Risk,

Volume 5/Number 3, Fall 2010: pp. 37-66.2. Eric Cope, Giulio Mignola, Gianluca Antonini and Roberto Ugoccioni, Challenges and Pitfalls in Measuring

Operational Risk from Loss Data, The Journal of Operational Risk, Volume 4/Number 4, Winter 2009/10: pp. 3-27.3. Principles for Eective Data Aggregation and Risk Reporting, (Basel Committee on Banking Supervision

Publication, January 2013).4. Nadine Gatzert, Hannah Wesker, A Comparative Assessment of Basel II/III and Solvency II, Working Paper,

Friedrich-Alexander-University of Erlangen-Nuremberg, Version: October 2011.*

UpdatesNone

Knowledge Point ChangesThe knowledge points have been consolidated and augmented as follows: Principles for sound operational risk management (New)

Enterprise Risk Management (ERM)

Modeling operational loss distributions (Consolidation of Operational loss data and subpoints)

Liquidity risk (including repurchase agreements and funding risks)

Model risk

Risk appetite frameworks

Risk-adjusted return on capital (RAROC)

Economic capital frameworks and capital allocation (Expansion of Economic Capital knowledge point)

Stress testing banks (New)

Evaluating the performance of risk management systems

Failure mechanics of dealer banks

Regulation and the Basel Accords (Subpoints deleted)



RISK MANAGEMENT AND INVESTMENT MANAGEMENT

Additions1. Andrew Ang, Asset Management: A Systematic Approach to Factor Investing

(New York: Oxford University Press, 2014). Chapter 13. Illiquid Assets (Excluding Section 13.5Portfolio Choice with Illiquid Assets)

Deletions1. Andrew W. Lo, Risk Management for Hedge Funds: Introduction and Overview, Financial Analysts Journal, Vol. 57,

No. 6 (November-December 2001), pp. 16-33.*

UpdatesNone

Knowledge Point ChangesAll subpoints under Hedge Funds have been eliminated.



CURRENT ISSUES IN FINANCIAL MARKETS

Additions1. Roe, M. (2013) Clearinghouse Overconfidence. California Law Review, 101 (6), pp. 1641-1703.*

2. OHara, M. (2014). High-Frequency Trading and Its Impact on Markets. Financial Analysts Journal, 70, 3. pp. 18-27.*

3. Clark, C. (2010). Controlling Risk in a Lightning-Speed Trading Environment.*

4. Clark, C. (2011). How Do Exchanges Control the Risk of High Speed Trading?*

5. Clark, C. and Ranjan, R. (2012). How Do Proprietary Trading Firms Control the Risks of High Speed Trading?*

6. Report on Cyber Security in the Banking Sector, New York State Department of Financial Services. May 2014.*

7. Framework for Improving Critical Infrastructure Cybersecurity, National Institute of Standards and Technology.*

8. The Changing Landscape for Derivatives, by John Hull, Joseph L. Rotman School of Management University of Toronto.*

9. Hull, J. and White, A. (2014). Valuing Derivatives: Funding Value Adjustments and Fair Value, Financial Analysts Journal 70 (3), pp. 46-56.*

DeletionsAll previous readings have been deleted.

UpdatesNone

Knowledge Point ChangesFive new knowledge points have been created to reect the new readings as follows: Role of clearinghouses in limiting systemic risk

Evolution of high frequency trading (HFT)

Risk management in an HFT environment

Current environment for derivatives trading

Funding value adjustments

An asterisk after a reading title indicates that the reading is freely available on the GARP website.

2015 FRM Committee Members

Dr. Ren Stulz (Chairman) .................................Ohio State University

Richard Apostolik .................................................Global Association of Risk Professionals

Richard Brandt .......................................................Citibank

Dr. Christopher Donohue ...................................Global Association of Risk Professionals

Herv Geny ..............................................................London Stock Exchange

Keith Isaac, FRM ....................................................TD Bank

Steve Lerit, CFA .....................................................UBS Wealth Management

William May .............................................................Global Association of Risk Professionals

Michelle McCarthy ................................................Nuveen Investments

Dr. Victor Ng ...........................................................Goldman Sachs & Co

Dr. Elliot Noma .......................................................Garrett Asset Management

Dr. Matthew Pritsker ............................................Federal Reserve Bank of Boston

Dr. Samantha Roberts, FRM..............................Capital One

Liu Ruixia ..................................................................Industrial and Commercial Bank of China

Dr. Til Schuermann ...............................................Oliver Wyman

Nick Strange............................................................Bank of England, Prudential Regulation Authority

Serge Sverdlov .......................................................Redmond Analytics

Alan Weindorf ........................................................Visa

Creating a culture of risk awareness

Global Association ofRisk Professionals

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2nd FloorBengal Wing9A Devonshire SquareLondon, EC2M 4YNU.K.+ 44 (0) 20 7397 9630

www.garp.org

2014 Global Association of Risk Professionals. All rights reserved. 11-18-14

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-prot global membership organization dedicated topreparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 Members andAliates from banks, investment management rms, government agencies, academic institutions, and corporations from more than195 countries and territories. GARP administers the Financial Risk Manager (FRM) and the Energy Risk Professional (ERP) Exams;certications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensiveprofessional education and training for professionals of all levels. www.garp.org.

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