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Success will take a lot of hard work, around 200 hours of study
time, and intuition and understanding of the topics rather than
just wrote memory.
Wileys FRM Exam Review lectures have as much information as
the Study Guides. Dont neglect them. Read the study notes but
then put them aside and focus on the tips in the lectures. Make
sure you are really comfortable with the calculate learning
objectives and focus mostly on what lead author Christian Cooper
tells you is important.
The FRM Exam Review program has been created in a way that
connects as many of the dots as possible to reduce memorization,
increase understanding, and give you the confidence to rely on
your best guess. Weve all taken tests where two answers are
obviously wrong but those last two could be 50/50. This is where
you will pass the test, using intuition to increase your odds
beyond a random guess.
THE SYSTEM
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TIPS
FOUNDATIONS OF RISK MANAGEMENTPART I
EXAM WEIGHT 20%
(FRM) 14 total readings in the 2016 curriculum
RISK MANAGEMENT SECTION WITHIN
FOUNDATIONS OF RISK MANAGEMENT
Set up a study plan, follow it, and reach out to Christian for
anything you are stuck on. No question is dumb and if you are
having a problem, a big chunk of the other students are, too,
and that is something Christian can focus on to explain better.
Christian is your partner in passing and wants to help in anyway
he can. Sometimes the dreaded duo of personal and professional
responsibilities often conspire to disrupt study plans. At some
point, intelligent compromises may have to be made (e.g., reduce
trips to the gym from 5 to 3 days per week, install Web browser
extensions that block Reddit, Recode, ZeroHedge etc.)
efficientlearning.com/frm
In the morning session of the FRM exam, there are 100 multiplechoice questions (in 3 hours) on the Part I FRM Exam. Thats
just under 2 minutes per question, so pace and stamina are
important. You should time yourself when you are taking the
practice exams.
The following table outlines the most important topics in terms
of the Weight to Study Session (SS) Ratio; it helps FRM candidates
determine where theyll get the best bang for their buck.
Quantitative AnalysisPart I
Multi-factor models
efficientlearning.com/frm
QUANTITATIVE ANALYSISPART I
EXAM WEIGHT 20%
(QA) 15 total reading in the 2016 curriculum
Bayesian analysis
No error, good
Type I error
Simulation methods
No error, good
Type II error
The only way to reduce the risk of Type I and Type II errors is to
increase the sample size.
HYPOTHESIS TESTING
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CONFIDENCE INTERVALS
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This is a huge chunk of the reading and much of the exam will
draw from this section.
The readings for the Part I exam focus on the basic definitions
of the product first then extend those ideas into pricing
methodology using replicating portfolios
The pure expectations theory says that the yield curve reflects
the markets expectation of future interest rates. If the market
consensus is that yields will be rising, then a longer maturity
bond must have a higher yield than a shorter maturity bond
(i.e., the yield curve is upward sloping).
efficientlearning.com/frm
The par yield curve is the coupon yield of newly issued, onthe-run securities trading at par (which can be approximated
by the yield to maturity).
Effectively, par yields are the compounded total of the
appropriate spot rates for each cash flow on a bond.
Spot yield curve:
Spot rates apply to a single future cash flow (and therefore can
be used to value a bond).
Not all spot rates can be directly observed, but par yields are
observable. It is possible to use a sectors par yield curve to
determine the sectors spot rate curve through a process called
bootstrapping, which is where we calculate the implied
spot rates (rates that apply to a single cash flow) from the par
rates. FRM candidates should be prepared to do the math. The
assigned reading spends a lot of time on notation, but notation
itself is not important. The only important item is getting the
correct answer.
Forward yield curve:
There is a trick that can save time if a forward rate is requested. With very short compounding periods (five periods
or less), the forward rate can be estimated as being the simple
Wiley 2015
efficientlearning.com/frm
With the basics out of the way, we can answer more complex
questions such as:
average. This allows for a quicker answer and does not require
the use of a calculator. For example, if the two- year spot is
7.0% and the one-year forward is 6.0%, then the two-year
forward has to be approximately 8.0% [(6.0 + 8.0)
Accordingly, when the par yield curve slopes upward, the spot
yield curve will reside above it, and when the par yield curve
slopes downward, the spot yield curve resides below it.
With a forward rate agreement (FRA), the buyer pays fixed and
receives floating. For example, with a 7 10 month FRA, the
buyer has agreed to pay the fixed rate. The floating rate it will
receive in return is the three-month rate of interest that exists
in seven months. The amount to be paid by the insurance
company is the difference in the rates times the notional
amount. But instead of paying the interest differential three
months after the seven months, the amount is paid immediately
(at the end of the seven months when the rate has been set).
Accordingly, if the two-year spot rate is larger than the oneyear spot rate, then the one-year forward rate one year from
now must be even larger.
FUTURES
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FORWARD CONTRACTS
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A forward contract is an agreement to enter into a future transaction at a price specified at the contracts initiation. The basic
forward contract terminology is as follows:
Wiley 2015
efficientlearning.com/frm
OPTIONS
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This strategy entails buying the stock (that are likely to remain
unchanged or appreciate over the next 30 days) and writing a
call option (that are slightly in the money) on the stock.
The risk of loss exists and it occurs as the stock price falls.
The maximum loss will occur when the stock falls to $0, and
will equal the cost of the stock less the call premium.
This strategy entails buying the stock and buying a put option
on the stock.
There is the cost of the put, which reduces the investors profit
if the stock rises.
The investors maximum loss is equal to the price paid for the
stock and put, less the strike price for the put. The maximum
gain is unlimited and the breakeven point is equal to the sum
of the per share prices paid for the stock and the put.
Dividends
Call
Put
Volatility
Call
Put
Interest Rate
Call
Put
Call
Put
Time to Expiration
Call
Put
Strike Price
Call
Put
Value-at-Risk (VaR)
Option valuation
Hedging
Operational risk
Make sure you are very comfortable with correlation problems,
especially how changing correlation impacts risk. Lastly, make
sure you are very clear on hedging with options and other
derivatives. This section continues into a little bit of content on
credit but the vast majority of credit readings will appear in PartII.
a.
b.
c.
Covariance Correlation
2.5
0.3
2.5
0.60
11.6
0.60
efficientlearning.com/frm
SWAPS
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does it endorse any pass rates claimed by the provider. Further, GARP is not responsible for any fees or costs paid by the user to Wiley, nor is GARP
responsible for any fees or costs of any person or entity providing any services to Wiley. FRM, GARP, and Global Association of Risk Professionals
are trademarks owned by the Global Association of Risk Professionals, Inc.
Wiley 2015