FRM AIM Statements Analysis

Compiled by
Section
Foundations of Risk Management
Quantitative Analysis
Financial Market & Products
Valuation & Risk Models
FRM Level 1
http://beatthefrm.wordpress.com/
AIM Statements/Objectives
Added AIM/Objectives
61
81
152
163
457
17
13
17
8
55
Weightage in exam
20%
20%
30%
30%
100%
For more info visit
Section
Weightage
Total AIM Statements
Newly Added
Foundations of Risk Management

20%
61
17
Book
Objectives
Risk Taking: A Corporate Governance

Perspective, (International Finance
Corporation, World Bank Group,
June 2012).
Define risk, identify the classifica
Define risk, identify the classif

Describe a risk profile and exp
Describe the role of risk gover
Identify Enterprise Risk Manag
Describe how the value of a ri
Describe problems which arise
Construct a risk-adjusted disco
Describe the certainty equival
Identify the four steps in the A
Identify the four risk treatmen
Compare and contrast the diff
Define hedging, explain the tr
Identify financial products a fi
Identify the methods a firm ca
Summarize the basic steps in
Identify examples of acceptab
Added Objectives
Describe the impact of leverage

Compare purely qualitative, sem
Edwin J. Elton, Martin J. Gruber, Stephen J.

Brown and William N. Goetzmann, Modern
Portfolio Theory and
Investment Analysis, 8th Edition (Hoboken,
NJ: John Wiley & Sons, 2009).
Chapter 5 ................................Delineating
Efficient Portfolios
Calculate the expected return

Explain how covariance and co
Describe the shape of the por
Define the minimum variance
Define the efficient frontier an
Chapter 13...............................The Standard
Capital Asset Pricing Model
Understand the derivation an

Describe the assumptions und
Describe the capital market lin
Use the CAPM to calculate the
Added Objectives
Define beta and calculate the be

Chapter 14...............................Nonstandard
Forms of Capital Asset Pricing Models
Describe the impact on the CA

Short sales disallowed
Riskless lending and borrowin
Personal taxes
Nonmarketable assets
Heterogeneous expectations
Non-price-taking behavior
Describe the following multi-p
Consumption-oriented CAPM
CAPM including inflation
Multi-beta CAPM
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 to
Performance Measurement: Single-Index
Performance Measurement Indicators
Calculate, compare, and evalu

Compute and interpret trackin
Define beta and calculate the
Explain the Morningstar Ratin
Anthony Tarantino and Deborah

Cernauskas, Risk Management in Finance:
Six Sigma and Other Next Generation
Techniques (Hoboken, NJ: John Wiley &
Sons, 2009).
Chapter 3 ................................Information
Risk and Data Quality Management
Describe ways in which a busi

Identify the most common iss
Identify the key dimensions w
Define operational data gover
Differentiate between base le
Explain the motivation and me
Steve Allen, Financial Risk Management: A
Practitioners Guide to Managing Market
and Credit Risk
(New York: John Wiley & Sons, 2003).
Chapter 4 ................................Financial
Disasters
Describe the key factors that l

Chase Manhattan and their in
Kidder Peabody
Barings
Allied Irish Bank
Union Bank of Switzerland (UB
Long Term Capital Manageme
Metallgesellschaft
Bankers Trust
Added Objectives
Socit Gnrale
JPMorgan, Citigroup, and Enron
Ren Stulz, Risk Management Failures:

What are They and When Do They
Happen? Fisher College of Business
Working Paper Series, (Oct 2008).
Define the role of risk manage

Describe how risk managemen
Describe how risk can be mism
Explain how a firm can fail to t
Explain the importance of com
Describe how firms can fail to
Explain the role of risk metrics

GARP Code of Conduct.
Describe the responsibility of

Describe the potential conseq
Added Readings
Understanding and Communicating Risk
Appetite, (COSO, Dr. Larry Rittenberg and
Frank Martens, January 2012).
Define risk appetite and explain

Describe considerations a firm
Describe the objective and cha
Differentiate between risk app
Explain how an organization ca
Explain the role of the Board o
Zvi Bodie, Alex Kane, and Alan J. Marcus,

Investments, 9th Edition (New York:
McGraw-Hill, 2010).
Chapter 10 ...........................Arbitrage
Pricing Theory and Multifactor Models of
Risk and Return
Describe the inputs, including fac

Calculate the expected return o
Describe the Law of One Price
Construct the Security Market
Explain how to construct a por
Describe the Arbitrage Pricing
ordpress.com/
Added/New Objective
Slight Modification
Major change/Deletion
2013 AIM STATEMENTS
Define risk, identify the classifications of risks, and explain the role played by risk in value creation.
Define risk, identify the classifications of risks, and explain the role played by risk in value creation
Describe a risk profile and explain how one is created.
Describe the role of risk governance in a corporation.
Identify Enterprise Risk Management (ERM) approaches and explain how they address risk management in an organization.
Describe how the value of a risky asset or project can be estimated through the development of a risk-adjusted discount rate
Describe problems which arise when using historical betas and equity risk premiums as inputs into a valuation model
Construct a risk-adjusted discount rate for an asset or project and apply that rate to estimate the value of the asset or project
Describe the certainty equivalent approach to estimating value and contrast it with the use of a risk-adjusted discount rate.
Identify the four steps in the AIRMIC risk management process and summarize the approach used in each step.
Identify the four risk treatment strategies a firm can use to manage its risks.
Compare and contrast the different types of probabilistic approaches used to estimate value and contrast probabilistic appro
Define hedging, explain the tradeoff between the costs and benefits of hedging, and assess whether it is appropriate for a firm
Identify financial products a firm can use to reduce or eliminate exposure to specific risks.
Identify the methods a firm can use to exploit risk better than its competitors, and explain how an organization can create a c
Summarize the basic steps in building a good risk management system.
Identify examples of acceptable, desirable, and best practices in corporate risk governance.
Describe the impact of leverage and taxes in the calculation of an equity beta for a firm.
Compare purely qualitative, semi-quantitative and purely quantitative methods used to estimate risks and describe examples of each.
Calculate the expected return and volatility of a portfolio of risky assets.

Explain how covariance and correlation affect the expected return and volatility of a portfolio of risky assets.
Describe the shape of the portfolio possibilities curve.
Define the minimum variance portfolio.
Define the efficient frontier and describe the impact on it of various assumptions concerning short sales and borrowing.
Understand the derivation and components of the CAPM.

Describe the assumptions underlying the CAPM.
Describe the capital market line.
Use the CAPM to calculate the expected return on an asset.
Define beta and calculate the beta of a single asset or portfolio.
Describe the impact on the CAPM of the following:

Short sales disallowed
Riskless lending and borrowing
Personal taxes
Nonmarketable assets
Heterogeneous expectations
Non-price-taking behavior
Describe the following multi-period versions of CAPM:
Consumption-oriented CAPM
CAPM including inflation
Multi-beta CAPM
Calculate, compare, and evaluate the Treynor measure, the Sharpe measure, and Jensens alpha.
Compute and interpret tracking error, the information ratio, and the Sortino ratio.
Define beta and calculate the beta of a portfolio.
Explain the Morningstar Rating System, VaR based, and management related risk-adjusted return measures.
Describe ways in which a business can be negatively impacted by poor quality data.
Identify the most common issues which result in data errors.
Identify the key dimensions which characterize acceptable data.
Define operational data governance and differentiate between data quality inspection and data validation.
Differentiate between base level and complex metrics in creating data quality scores, and describe the three different viewpo
Explain the motivation and mechanics of creating a data quality scorecard.
Describe the key factors that led to and the lessons learned from the following risk management case studies:
Chase Manhattan and their involvement with Drysdale Securities
Kidder Peabody
Barings
Allied Irish Bank
Union Bank of Switzerland (UBS)
Long Term Capital Management (LTCM)
Metallgesellschaft
Bankers Trust
Socit Gnrale
JPMorgan, Citigroup, and Enron
Define the role of risk management and explain why a large financial loss is not necessarily a failure of risk
Describe how risk management can fail
Describe how risk can be mismeasured.
Explain how a firm can fail to take known and unknown risks into account in making strategic decisions.
Explain the importance of communication in effective risk management.
Describe how firms can fail to correctly monitor and manage risk on an ongoing basis.
Explain the role of risk metrics and describe the shortcomings of existing risk metrics.
Describe the responsibility of each GARP member with respect to professional integrity, ethical conduct, conflicts, of interest,
Describe the potential consequences of violating the GARP Code of Conduct.
Define risk appetite and explain the role of risk appetite in corporate governance.
Describe considerations a firm must make in determining its risk appetite, and explain how an organizations risk appetite can differ for
Describe the objective and characteristics of an effective risk appetite statement.
Differentiate between risk appetite and risk tolerance, and explain how an organization can align its risk tolerance to its risk appetite.
Explain how an organization can develop, communicate, monitor and update its risk appetite.
Explain the role of the Board of Directors in overseeing an organizations risk appetite.
Describe the inputs, including factor betas, to a multi factor model.

Calculate the expected return of an asset using a single-factor and a multi-factor model.
Describe the Law of One Price and assess whether an arbitrage situation exists using a multi-factor model.
Construct the Security Market Line for a well-diversified portfolio using a single-factor model.
Explain how to construct a portfolio to hedge exposure to multiple factors.
Describe the Arbitrage Pricing Theory (APT) and the Fama-French three-factor model, and explain the underlying assumptions of each.
nge/Deletion
2013 AIM STATEMENTS
, and explain the role played by risk in value creation.
isks, and explain the role played by risk in value creation

e is created.
orporation.
M) approaches and explain how they address risk management in an organization.
project can be estimated through the development of a risk-adjusted discount rate, how such a risk-adjusted discount rate ca
g historical betas and equity risk premiums as inputs into a valuation model
r an asset or project and apply that rate to estimate the value of the asset or project.
h to estimating value and contrast it with the use of a risk-adjusted discount rate.
management process and summarize the approach used in each step.
a firm can use to manage its risks.
of probabilistic approaches used to estimate value and contrast probabilistic approaches in general with risk-adjusted method
een the costs and benefits of hedging, and assess whether it is appropriate for a firm to hedge in particular cases.
to reduce or eliminate exposure to specific risks.
ploit risk better than its competitors, and explain how an organization can create a culture of prudent risk-taking among its em
ood risk management system.
e, and best practices in corporate risk governance.
he calculation of an equity beta for a firm.

e and purely quantitative methods used to estimate risks and describe examples of each.
ty of a portfolio of risky assets.

fect the expected return and volatility of a portfolio of risky assets.
ilities curve.
the impact on it of various assumptions concerning short sales and borrowing.
nts of the CAPM.

CAPM.
eturn on an asset.
asset or portfolio.
ollowing:
ons of CAPM:
ynor measure, the Sharpe measure, and Jensens alpha.

information ratio, and the Sortino ratio.
ortfolio.
aR based, and management related risk-adjusted return measures.
negatively impacted by poor quality data.

esult in data errors.
terize acceptable data.
differentiate between data quality inspection and data validation.
plex metrics in creating data quality scores, and describe the three different viewpoints by which complex data metrics can be
creating a data quality scorecard.
he lessons learned from the following risk management case studies:

with Drysdale Securities
xplain why a large financial loss is not necessarily a failure of risk
and unknown risks into account in making strategic decisions.

n in effective risk management.
onitor and manage risk on an ongoing basis.
be the shortcomings of existing risk metrics.
member with respect to professional integrity, ethical conduct, conflicts, of interest, confidentiality of information and adhere
olating the GARP Code of Conduct.
k appetite in corporate governance.

n determining its risk appetite, and explain how an organizations risk appetite can differ for various risk factors.
f an effective risk appetite statement.
tolerance, and explain how an organization can align its risk tolerance to its risk appetite.
ommunicate, monitor and update its risk appetite.
overseeing an organizations risk appetite.
a multi factor model.

ing a single-factor and a multi-factor model.
hether an arbitrage situation exists using a multi-factor model.
ll-diversified portfolio using a single-factor model.
ge exposure to multiple factors.
and the Fama-French three-factor model, and explain the underlying assumptions of each.
2014 AIM MODIFICATION
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Slight Addition: Describe the stages of the ERM process and explain the risk management approaches that can be used in eac
Slight modification: Although the main idea still remains the same i.e. use WACC to calculate risk-adjusted discount rate whic
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Deletion
Major Change: Deletion of Four steps in AIRMIC risk management process although a part of it is still covered under a new AIM
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This is actually not an addition as it was earlier covered under Performance measures
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New
New
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New
New
New
New
New
New
New
New
that can be used in each stage of the process.

sted discount rate which is then applied on expected cash flows to arrive at NPV. The description of relative strengths and weaknesses ad
overed under a new AIM statement as follows:Compare purely qualitative, semi-quantitative and purely quantitative methods used to est
engths and weaknesses addressed earlier are no longer covered in 2014 AIM statements
ative methods used to estimate risks and describe examples of each.
For more info visit
Section
Weightage
Newly Added
Quantitative Analysis
Book
20%
81
13
Objectives
Michael Miller, Mathematics and Statistics

for Financial Risk Management (Hoboken,
Chapter 2 ................................Probabilities
1
2
3
4
5
6
7
8
Describe the concept of probabil
9
10
11
12
13
14
15
Define, calculate, and interpre

Interpret and calculate the va
Calculate the mean and varian
Describe the four central mom
Interpret the skewness and ku
Define and interpret the best
Describe and distinguish betw

Define and distinguish betwee
Calculate the probability of an
Distinguish between independ
Define joint probability, descr
Define and calculate a conditi
Describe Bayes Theorem and
Chapter 3 ................................Basic
Statistics
Chapter 4 ................................Distributions
16 Define and distinguish betwee
17
18
19
20
21
22
Describe the key properties of

Describe and apply the Centra
Describe the properties of ind
Describe the properties of line
Identify the key properties an
Describe a mixture distributio
23
24
25
26
27
28
29
30
31
Define, calculate and interpre

Define and estimate the samp
Define and construct a confid
Define and interpret the null h
Define, interpret, and calculat
Describe the process of select
Differentiate between a one-t
Interpret the results of hypoth
Describe and apply the princip
32
33
34
35
36
37
38
39
40
41
Explain how regression analys

Define and interpret a popula
Define and interpret the stoch
Define and interpret a sample
Describe the key properties of
Describe the method and thre
Summarize the benefits of usi
Describe the properties of OLS
Define and interpret the expla
Interpret the results of an ord
Chapter 5 ................................Hypothesis
Testing and Confidence Intervals
James Stock and Mark Watson,

Introduction to Econometrics, Brief Edition
(Boston: Pearson Education, 2008).
Chapter 4 ................................Linear
Regression with One Regressor
Chapter 5 ................................Regression
with a Single Regressor: Hypothesis Tests
and Confidence Intervals
42
43
44
45
46
47
48

Define and interpret the p-val
Define and interpret hypothes
Define and differentiate betw
Describe the implications of h
Explain the Gauss-Markov The
Define, describe, apply, and in
Describe the conditions under
50
51
52
53
54
55
56
57
Define, interpret, and describ

Distinguish between single an
Define and interpret the slope
Describe homoskedasticity an
Describe the OLS estimator in
Explain the assumptions of th
Explain the concept of imperf
Added Objective
Chapter 6 ................................Linear
Regression with Multiple Regressors
Chapter 7 ................................Hypothesis
Tests and Confidence Intervals in Multiple
Regression
58 Construct, perform, and interp

59 Define and interpret the F-sta
60
61
62
63
64
Added Objective

Describe and interpret tests o
Define and interpret confiden
Define and describe omitted v
Interpret the R2 and adjusted
Construct, apply, and interpre
Philippe Jorion, Value-at-Risk:The New

Benchmark for Managing Financial Risk,
3rd Edition.
(New York: McGraw Hill, 2007).
Chapter 12...............................Monte Carlo Please note that GARP has discontinued the use of Philippe
Methods
66
67
68
69
70
71
72
73
74
Describe how to simulate a price

Describe how to simulate variou
Describe the bootstrap method.
Explain how simulations can be u
Describe the relationship betwee
Describe and identify simulation
Explain how to simulate correlat
Describe deterministic simulatio
Describe the drawbacks and limi
75
76
77
78
79
80
81
82
Explain how historical data and v

Describe the exponentially weigh
Describe the generalized auto re
Estimate volatility using the GA
Explain mean reversion and ho
Explain how the parameters of th
Explain how GARCH models perf
Describe how correlations and co
Describe the volatility term struc
John Hull, Options, Futures, and Other

Derivatives, 8th Edition (New York: Pearson
Prentice Hall, 2012).
Chapter 22 ..............................Estimating
Volatilities and Correlations
Added Objective
Added Readings
Dessislava Pachamanova and Frank Fabozzi,
Simulation and Optimization in Finance
(Hoboken, NJ: John Wiley & Sons, 2010).
Chapter 4 ................................Simulation
Modeling
84
85
86
87
88
89
90
91
92
93
Describe different ways of choos

Understand and interpret the re
Describe the advantages of simu
Describe how correlations can be
Interpret discretization error bia
Describe the inverse transform m
Describe standards for an effecti
Describe quasi-random (low-disc
Describe quasi-random (low-disc
dpress.com/
Added/New Objective
Slight Modification
2013 AIM STATEMENTS
Describe the concept of probability.
Describe and distinguish between continuous and discrete random variables.

Define and distinguish between the probability density function, the cumulative distribution function and the inverse cumula
Calculate the probability of an event given a discrete probability function.
Distinguish between independent and mutually exclusive events.
Define joint probability, describe a probability matrix and calculate joint probabilities using probability matrices.
Define and calculate a conditional probability, and distinguish between conditional and unconditional probabilities.
Describe Bayes Theorem and apply this theorem in the calculation of conditional probabilities.
Define, calculate, and interpret the mean, standard deviation, and variance of a random variable.
Define, calculate, and interpret the covariance and correlation between two random variables.
Interpret and calculate the variance for a portfolio and understand the derivation of the minimum variance hedge ratio.
Calculate the mean and variance of sums of larger variables.
Describe the four central moments of a statistical variable or distribution: mean, variance, skewness and kurtosis.
Interpret the skewness and kurtosis of a statistical distribution, and interpret the concepts of coskewness and cokurtosis.
Define and interpret the best linear unbiased estimator (BLUE).
Define and distinguish between parametric and nonparametric distributions.
Describe the key properties of the uniform distribution, Bernoulli distribution, Binomial distribution, Poisson distribution, nor
Describe and apply the Central Limit Theorem and explain the conditions for the theorem.
Describe the properties of independent and identically distributed (i.i.d.) variables.
Describe the properties of linear combinations of normally distributed variables.
Identify the key properties and parameters of the Chi-squared, Students t, and F-distributions.
Describe a mixture distribution and explain the creation and characteristics of mixture distributions.
Define, calculate and interpret the mean and variance of the sample mean.
Define and estimate the sample mean and sample variance.
Define and construct a confidence interval.
Define and interpret the null hypothesis and the alternative hypothesis, and calculate the test statistics.
Define, interpret, and calculate the t-statistic.
Describe the process of selecting and constructing a null hypothesis.
Differentiate between a one-tailed and a two-tailed test and explain the circumstances in which to use each test.
Interpret the results of hypothesis tests with a specific level of confidence.
Describe and apply the principle of Chebyshevs inequality.
Explain how regression analysis in econometrics measures the relationship between dependent and independent variables.
Define and interpret a population regression function, regression coefficients, parameters, slope and the intercept.
Define and interpret the stochastic error term.
Define and interpret a sample regression function, regression coefficients, parameters, slope and the intercept.
Describe the key properties of a linear regression.
Describe the method and three key assumptions of ordinary least squares (OLS) for estimation of parameters.
Summarize the benefits of using OLS estimators.
Describe the properties of OLS estimators and their sampling distributions, and explain the properties of consistent estimator
Define and interpret the explained sum of squares, the total sum of squares, the residual sum of squares, the standard error
Interpret the results of an ordinary least squares regression.
Define, calculate, and interpret confidence intervals for regression coefficients.

Define and interpret the p-value.
Define and interpret hypothesis tests about regression coefficients.
Define and differentiate between homoskedasticity and heteroskedasticity.
Describe the implications of homoskedasticity and heteroskedasticity.
Explain the Gauss-Markov Theorem and its limitations, and alternatives to the OLS.
Define, describe, apply, and interpret the t-statistic when the sample size is small.
Describe the conditions under which the OLS is the best linear conditionally unbiased estimator.
Define, interpret, and describe methods for addressing omitted variable bias.
Distinguish between single and multiple regression.
Define and interpret the slope coefficient in a multiple regression.
Describe homoskedasticity and heterosckedasticity in a multiple regression.
Describe the OLS estimator in a multiple regression.
Define, calculate, and interpret measures of fit in multiple regression.
Explain the assumptions of the multiple linear regression model.
Explain the concept of imperfect and perfect multicollinearity and their implications.
Construct, perform, and interpret hypothesis tests and confidence intervals for a single coefficient in a multiple regression.
Define and interpret the F-statistic.
Define, calculate, and interpret the homoskedasticity-only F-statistic.

Describe and interpret tests of single restrictions involving multiple coefficients.
Define and interpret confidence sets for multiple coefficients.
Define and describe omitted variable bias in multiple regressions.
Interpret the R2 and adjusted-R2
Construct, apply, and interpret hypothesis tests and confidence intervals for multiple coefficients in a multiple regression.
tinued the use of Philippe Jorion for Monte carlo simulation for the year 2014. Instead a new book "Simul
Describe how to simulate a price path using a geometric Brownian motion model.
Describe how to simulate various distributions using the inverse transform method.
Describe the bootstrap method.
Explain how simulations can be used for computing VaR and pricing options.
Describe the relationship between the number of Monte Carlo replications and the standard error of the estimated values.
Describe and identify simulation acceleration techniques.
Explain how to simulate correlated random variables using Cholesky factorization.
Describe deterministic simulations.
Describe the drawbacks and limitations of simulation procedures.
Explain how historical data and various weighting schemes can be used in estimating volatility.
Describe the exponentially weighted moving average (EWMA) model for estimating volatility and its properties, and estimate volatility u
Describe the generalized auto regressive conditional heteroscedasticity (GARCH(p,q)) model for estimating volatility and its properties:
Estimate volatility using the GARCH(p,q) model
Explain mean reversion and how it is captured in the GARCH(1,1) model
Explain how the parameters of the GARCH(1,1) and the EWMA models are estimated using maximum likelihood methods.
Explain how GARCH models perform in volatility forecasting.
Describe how correlations and covariances are calculated, and explain the consistency condition for covariances.
Describe the volatility term structure and the impact of volatility changes.
Describe different ways of choosing probability distributions in creating simulation models.

Understand and interpret the results generated by Monte Carlo simulation.
Describe the advantages of simulation modeling when multiple input variables and compounding distributions
Describe how correlations can be incorporated into simulation modeling.
Describe the relationship between the accuracy of a simulation model and the number of scenarios run in the simulation.
Interpret discretization error bias and describe how to identify an efficient estimator.
Describe the inverse transform method and its implementation in discrete and continuous distributions.
Describe standards for an effective pseudorandom number generator and explain midsquare technique and
Describe quasi-random (low-discrepancy) sequences and explain how they work in simulations.
Describe quasi-random (low-discrepancy) sequences and explain how they work in simulations.
nge/Deletion
2013 AIM STATEMENTS
ous and discrete random variables.

ability density function, the cumulative distribution function and the inverse cumulative distribution function, and calculate pr
n a discrete probability function.
utually exclusive events.
bility matrix and calculate joint probabilities using probability matrices.
ility, and distinguish between conditional and unconditional probabilities.
heorem in the calculation of conditional probabilities.
standard deviation, and variance of a random variable.

ance and correlation between two random variables.
portfolio and understand the derivation of the minimum variance hedge ratio.
of larger variables.
atistical variable or distribution: mean, variance, skewness and kurtosis.
tatistical distribution, and interpret the concepts of coskewness and cokurtosis.
sed estimator (BLUE).
ic and nonparametric distributions.
m distribution, Bernoulli distribution, Binomial distribution, Poisson distribution, normal distribution and lognormal distributio
rem and explain the conditions for the theorem.
nd identically distributed (i.i.d.) variables.
tions of normally distributed variables.
rs of the Chi-squared, Students t, and F-distributions.
n the creation and characteristics of mixture distributions.
and variance of the sample mean.

d sample variance.
l.
nd the alternative hypothesis, and calculate the test statistics.
stic.
structing a null hypothesis.
two-tailed test and explain the circumstances in which to use each test.
ith a specific level of confidence.
shevs inequality.
metrics measures the relationship between dependent and independent variables.

ion function, regression coefficients, parameters, slope and the intercept.
term.
function, regression coefficients, parameters, slope and the intercept.
gression.
mptions of ordinary least squares (OLS) for estimation of parameters.
mators.
and their sampling distributions, and explain the properties of consistent estimators in general.
f squares, the total sum of squares, the residual sum of squares, the standard error of the regression (SER), and the regression
quares regression.
e intervals for regression coefficients.
ut regression coefficients.
kedasticity and heteroskedasticity.
icity and heteroskedasticity.
s limitations, and alternatives to the OLS.
t-statistic when the sample size is small.
OLS is the best linear conditionally unbiased estimator.
or addressing omitted variable bias.

egression.
in a multiple regression.
edasticity in a multiple regression.
egression.
of fit in multiple regression.
near regression model.
ect multicollinearity and their implications.
esis tests and confidence intervals for a single coefficient in a multiple regression.
skedasticity-only F-statistic.
rictions involving multiple coefficients.
multiple coefficients.
in multiple regressions.
s tests and confidence intervals for multiple coefficients in a multiple regression.
r Monte carlo simulation for the year 2014. Instead a new book "Simulation and Optimization in Finance"
geometric Brownian motion model.

s using the inverse transform method.
puting VaR and pricing options.

er of Monte Carlo replications and the standard error of the estimated values.
techniques.
ariables using Cholesky factorization.
mulation procedures.
ting schemes can be used in estimating volatility.

average (EWMA) model for estimating volatility and its properties, and estimate volatility using the EWMA model.
ditional heteroscedasticity (GARCH(p,q)) model for estimating volatility and its properties:
del
ed in the GARCH(1,1) model
1) and the EWMA models are estimated using maximum likelihood methods.
ity forecasting.
e calculated, and explain the consistency condition for covariances.
impact of volatility changes.
ty distributions in creating simulation models.

ed by Monte Carlo simulation.
ng when multiple input variables and compounding distributions
d into simulation modeling.
cy of a simulation model and the number of scenarios run in the simulation.
e how to identify an efficient estimator.
s implementation in discrete and continuous distributions.
ndom number generator and explain midsquare technique and
uences and explain how they work in simulations.
uences and explain how they work in simulations.
zation in Finance" by Dessislava Pachamanova and Frank Fabozzi is prescribed. Look for Added readings at
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Deletion. This however will be covered in Financial Markets and Products section
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Deletion. Although it doesn't make any difference
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Although it has been captured as an AIM for 2014, it is well explained in the 2013 curriculum also
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by Dessislava Pachamanova and Frank Fabozzi is prescribed. Look for Added readings at the bottom to kn
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New
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For more info visit
Section
Weightage
Newly Added
Book
FMP
30%
152
17
Objectives
Hull, Options, Futures, and Other

Derivatives, 8th Edition.
Chapter 1 .................................Introduction
1
2
3
4
5
6
7
8
Differentiate between an open o
9
10
11
12
13
14
15
16
17
Define and describe the key fe

Explain the convergence of fu
Describe the rationale for mar
Describe the role of a clearing
Describe the role of collateral
Identify and describe the diffe
Describe the mechanics of the
Define and demonstrate an un
Compare and contrast forwar
18
19
20
21
Define and differentiate betw

Describe the arguments for an
Define the basis and the vario
Define cross hedging, and com
Describe the over-the-counte

Differentiate between options
Calculate and identify option a
Describe, contrast, and calcula
Describe, contrast, and calcula
Calculate an arbitrage payoff a
Describe some of the risks tha
Chapter 2 ................................Mechanics of
Futures Markets
Chapter 3 ................................Hedging
Strategies Using Futures
22 Define, compute, and interpre

23 Explain how to use stock inde
24 Describe what is meant by ro
Chapter 4 ................................Interest
Rates
25
26
27
28
29
30
31
32
Describe Treasury Rates, LIBO

Calculate the value of an inves
Calculate the theoretical price
Calculate forward interest rat
Calculate the value of the cash
Describe the limitations of du
Calculate the change in a bon
Describe the major theories o
33
34
35
36
37
38
39
40
41
42
43
Differentiate between investm

Define short-selling and short
Describe the differences betw
Calculate the forward price, g
Explain the relationship betwe
Calculate a forward foreign ex
Define income, storage costs,
Calculate the futures price on
Define and calculate, using th
Describe the various delivery
Define contango and backwar
Explain the relationship betwe
systematic and nonsystematic
45
46
47
48
49
50
51
Identify the most commonly u

Calculate the conversion of a
Differentiate between the cle
Explain and calculate a U.S. Tr
Calculate the cost of deliverin
Describe the impact of the lev
Calculate the theoretical futur
Chapter 5
................................Determination of
Forward and Futures Prices
Added Objective
Chapter 6 ................................Interest Rate

Futures
52
53
54
55
56
Calculate the final contract pr

Describe and compute the Eu
Explain how Eurodollar future
Calculate the duration-based
Explain the limitations of usin
57
58
59
60
61
62
63
64
65
66
67
68
69
70
Explain the mechanics of a pla

Explain how a plain vanilla int
Explain the role of financial in
Describe the role of the confir
Describe the comparative adv
Calculate the value of a plain v
Calculate the value of a plain v
Explain the mechanics of a cur
Describe the comparative adv
Explain how a currency swap c
Calculate the value of a curren
Calculate the value of a curren
Describe the role of credit risk
Chapter 7 ................................Swaps
Added Objective
Identify and describe other types

Explain how the discount rates in
Chapter 10...............................Properties of
Stock Options
72
73
74
75
76
Identify the six factors that aff

Identify, interpret and compu
Explain put-call parity and calc
Explain the early exercise feat
Explain the effects of dividend
77
78
79
80
81
Explain the motivation to initiate

Describe and explain the use and
Calculate the payoffs of various s
Describe and explain the use and
Compute the payoffs of combina
Chapter 11................................Trading
Strategies Involving Options
Robert McDonald, Derivatives Markets, 3rd

Edition (Boston: Addison-Wesley, 2013).
82
83
84
85
86
87
88
89
90
91
92
93
94
Define commodity terminology s

Explain the basic equilibrium form
Describe an arbitrage transaction
Define the lease rate and explain
Define carry markets, and explai
Compute the forward price of a c
Compare the lease rate with the
Identify factors that impact gold,
Define and compute a commodi
Explain how basis risk can occur
Evaluate the differences betwee
Describe examples of cross-hedg
Explain how to create a synthetic
95
96
97
98
99
100
101
102
103
104
Define bill of lading.

Define the major risks involved w
Differentiate between ordinary a
Describe the basic characteristic
Describe an arbitrage portfolio
Describe the structure of the fut
Define basis risk and the varianc
Identify a commonly used measu
Define and differentiate betwee
Describe volume and open intere
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
Anthony Saunders and Marcia Millon Cornett,

Financial Institutions Management: A Risk
Management Approach,
7th Edition (New York: McGraw-Hill, 2011).
Chapter 14...............................Foreign
Exchange Risk
105
106
107
108
109
110
111
112
113
114
Calculate a financial institutions

Explain how a financial institutio
Calculate a financial institutions
Identify and describe the differen
Identify the sources of foreign ex
Calculate the potential gain or lo
Explain balance-sheet hedging w
Describe how a non-arbitrage as
Explain why diversification in mu
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
Describe a bond indenture and e

Explain a bonds maturity date a
Describe the main types of intere
Describe zero-coupon bonds, the
Describe the various security typ
Mortgage bonds
Collateral trust bonds
Equipment trust certificates
Debenture bonds (including su
Guaranteed bonds
Describe the mechanisms by wh
Describe and differentiate betwe
Describe event risk and explain w
Define high-yield bonds, and des
Define and differentiate betwee
Define recovery rates and descri
Frank Fabozzi, The Handbook of Fixed Income

Securities, 8th Edition (New York: McGraw-Hill,
2012).
Chapter 12...............................Corporate
Bonds, by Frank Fabozzi, Steven Mann and
Adam Cohen
John B. Caouette, Edward I. Altman, Paul

Narayanan, and Robert W.J. Nimmo,
Managing Credit Risk, 2nd Edition
(New York: John Wiley & Sons, 2008).
Chapter 6 ................................The Rating
Agencies
131
132
133
134
135
136
137
138
139
Describe the role of rating agenc

Explain market and regulatory fo
Describe a rating scale, define cr
Describe Standard and Poors an
Describe the difference between
Describe and contrast the proces
Describe the ratings performanc
Describe some of the trends and
140
141
142
143
144
Describe the risks in the commod

Describe the key features and te
Differentiate between equity sec
Define and interpret volume and
Explain the requisites for a succe
145
146
147
148
149
150
Describe the features of a mode

Explain the organization and adm
Describe exchange membership,
Explain original and variation ma
Describe the steps that are taken
Describe the mechanics of future
Added Readings
The Institute for Financial Markets, Futures and
Options (Washington, DC: The Institute for
Financial Markets, 2011).
Chapter 1 .................................Introduction:
Futures and Options Markets
Chapter 2 ................................Futures Industry

Institutions and Professionals
151 Explain the role of futures comm

Chapter 7 ................................Hedging with
Futures and Options
152 Define the terms long the basis

153 Explain exchange for physical (EF
154 Describe and calculate the payof
dpress.com/
Added/New Objective
Slight Modification
2013 AIM STATEMENTS
Differentiate between an open outcry system and electronic trading.
Describe the over-the-counter market, how it differs from trading on an exchange, and its advantages and disadvantages.
Differentiate between options, forwards, and futures contracts.
Calculate and identify option and forward contract payoffs.
Describe, contrast, and calculate the payoffs from hedging strategies involving forward contracts and options.
Describe, contrast, and calculate the payoffs from speculative strategies involving futures and options.
Calculate an arbitrage payoff and describe how arbitrage opportunities are ephemeral.
Describe some of the risks that can arise from the use of derivatives.
Define and describe the key features of a futures contract, including the asset, the contract price and size, delivery and limits.
Explain the convergence of futures and spot prices.
Describe the rationale for margin requirements and explain how they work.
Describe the role of a clearinghouse in futures transactions.
Describe the role of collateralization in the over-the-counter market and compare it to the margining system.
Identify and describe the differences between a normal and inverted futures market.
Describe the mechanics of the delivery process and contrast it with cash settlement.
Define and demonstrate an understanding of the impact of different order types, including: market, limit, stop-loss, stop-limi
Compare and contrast forward and futures contracts.
Define and differentiate between short and long hedges and identify appropriate uses.
Describe the arguments for and against hedging and the potential impact of hedging on firm profitability.
Define the basis and the various sources of basis risk, and explain how basis risks arise when hedging with futures.
Define cross hedging, and compute and interpret the minimum variance hedge ratio and hedge effectiveness.
Define, compute, and interpret the optimal number of futures contracts needed to hedge an exposure, and explain and calcu
Explain how to use stock index futures contracts to change a stock portfolios beta.
Describe what is meant by rolling the hedge forward and describe some of the risks that arise from such a strategy.
Describe Treasury Rates, LIBOR, Repo Rates, and what is meant by the risk-free rate.
Calculate the value of an investment using daily, weekly, monthly, quarterly, semiannual, annual, and continuous compoundi
Calculate the theoretical price of a coupon paying bond using spot rates.
Calculate forward interest rates from a set of spot rates.
Calculate the value of the cash flows from a forward rate agreement (FRA).
Describe the limitations of duration and how convexity addresses some of them.
Calculate the change in a bonds price given duration, convexity, and a change in interest rates.
Describe the major theories of the term structure of interest rates.
Differentiate between investment and consumption assets.

Define short-selling and short squeeze.
Describe the differences between forward and futures contracts and explain the relationship between forward and spot pric
Calculate the forward price, given the underlying assets price, with or without short sales and/or consideration to the income
Explain the relationship between forward and futures prices.
Calculate a forward foreign exchange rate using the interest rate parity relationship.
Define income, storage costs, and convenience yield.
Calculate the futures price on commodities incorporating income/storage costs and/or convenience yields.
Define and calculate, using the cost-of-carry model, forward prices where the underlying asset either does or does not have in
Describe the various delivery options available in the futures markets and how they can influence futures prices.
Define contango and backwardation, interpret the effect contango or backwardation may have on the relationship between c
Explain the relationship between current futures prices and expected future spot prices, including the impact of
systematic and nonsystematic risk.
Identify the most commonly used day count conventions, describe the markets that each one is typically used in, and apply e
Calculate the conversion of a discount rate to a price for a U.S. Treasury bill.
Differentiate between the clean and dirty price for a U.S. Treasury bond; calculate the accrued interest and dirty price on a U.
Explain and calculate a U.S. Treasury bond futures contract conversion factor.
Calculate the cost of delivering a bond into a Treasury bond futures contract.
Describe the impact of the level and shape of the yield curve on the cheapest-to-deliver bond decision.
Calculate the theoretical futures price for a Treasury bond futures contract.
Calculate the final contract price on a Eurodollar futures contract.

Describe and compute the Eurodollar futures contract convexity adjustment.
Explain how Eurodollar futures can be used to extend the LIBOR zero curve.
Calculate the duration-based hedge ratio and describe a duration-based hedging strategy using interest rate futures.
Explain the limitations of using a duration-based hedging strategy.
Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows.
Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash f
Explain the role of financial intermediaries in the swaps market.
Describe the role of the confirmation in a swap transaction.
Describe the comparative advantage argument for the existence of interest rate swaps and explain some of the criticisms of t
Calculate the value of a plain vanilla interest rate swap based on two simultaneous bond positions.
Calculate the value of a plain vanilla interest rate swap from a sequence of forward rate agreements (FRAs).
Explain the mechanics of a currency swap and compute its cash flows.
Describe the comparative advantage argument for the existence of currency swaps.
Explain how a currency swap can be used to transform an asset or liability and calculate the resulting cash flows.
Calculate the value of a currency swap based on two simultaneous bond positions.
Calculate the value of a currency swap based on a sequence of FRAs.
Describe the role of credit risk inherent in an existing swap position.
Identify and describe other types of swaps, including commodity, volatility and exotic swaps.
Explain how the discount rates in a plain vanilla interest rate swap are computed
Identify the six factors that affect an options price and describe how these six factors affect the price for both European and
Identify, interpret and compute upper and lower bounds for option prices.
Explain put-call parity and calculate, using the put-call parity on a non-dividend-paying stock, the value of aEuropean and Am
Explain the early exercise features of American call and put options on a non-dividend-paying stock and the price effect early
Explain the effects of dividends on the put-call parity, the bounds of put and call option prices, and the early exercise feature
Explain the motivation to initiate a covered call or a protective put strategy.

Describe and explain the use and payoff functions of spread strategies, including bull spread, bear spread, box spread, calendar spread, b
Calculate the payoffs of various spread strategies.
Describe and explain the use and payoff functions of combination strategies, including straddles, strangles, strips, and straps.
Compute the payoffs of combination strategies.
Define commodity terminology such as storage costs, carry markets, lease rate, and convenience yield.
Explain the basic equilibrium formula for pricing commodity forwards.
Describe an arbitrage transaction in commodity forwards, and compute the potential arbitrage profit.
Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures.
Define carry markets, and explain the impact of storage costs and convenience yields on commodity forward prices and no-arbitrage bou
Compute the forward price of a commodity with storage costs.
Compare the lease rate with the convenience yield.
Identify factors that impact gold, corn, electricity, natural gas, and oil forward prices.
Define and compute a commodity spread.
Explain how basis risk can occur when hedging commodity price exposure.
Evaluate the differences between a strip hedge and a stack hedge and explain how these differences impact risk management.
Describe examples of cross-hedging, specifically the process of hedging jet fuel with crude oil and using weather derivatives.
Explain how to create a synthetic commodity position, and use it to explain the relationship between the forward price and the expected
Define bill of lading.

Define the major risks involved with commodity spot transactions.
Differentiate between ordinary and extraordinary transportation risks.
Describe the basic characteristics and differences between hedgers, speculators, and arbitrageurs.
Describe an arbitrage portfolio and explain the conditions for a market to be arbitrage-free.
Describe the structure of the futures market.
Define basis risk and the variance of the basis.
Identify a commonly used measure for determining the effectiveness of hedging a spot position with a futures contract, and compute an
Define and differentiate between an Exchange for Physical agreement and an Alternative Delivery Procedure.
Describe volume and open interest and how they relate to liquidity and market depth.
Calculate a financial institutions overall foreign exchange exposure.

Explain how a financial institution could alter its net position exposure to reduce foreign exchange risk.
Calculate a financial institutions potential dollar gain or loss exposure to a particular currency.
Identify and describe the different types of foreign exchange trading activities.
Identify the sources of foreign exchange trading gains and losses.
Calculate the potential gain or loss from a foreign currency denominated investment.
Explain balance-sheet hedging with forwards.
Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem, and use this theorem
Explain why diversification in multicurrency asset-liability positions could reduce portfolio risk.
Describe the relationship between nominal and real interest rates.
Describe a bond indenture and explain the role of the corporate trustee in a bond indenture.
Explain a bonds maturity date and how it impacts bond retirements.
Describe the main types of interest payment classifications.
Describe zero-coupon bonds, the relationship between original-issue-discount and reinvestment risk, and the treatment of zeroes in ban
Describe the various security types relevant for corporate bonds, including:
Mortgage bonds
Collateral trust bonds
Equipment trust certificates
Debenture bonds (including subordinated and convertible debentures)
Guaranteed bonds
Describe the mechanisms by which corporate bonds can be retired before maturity, including call provisions, sinking-fund provisions, ma
Describe and differentiate between credit default risk and credit spread risk.
Describe event risk and explain what may cause it in corporate bonds.
Define high-yield bonds, and describe types of high-yield bond issuers and some of the payment features peculiar to high yield bonds.
Define and differentiate between an issuer default rate and a dollar default rate.
Define recovery rates and describe the relationship between recovery rates and seniority.
Describe the role of rating agencies in the financial markets.

Explain market and regulatory forces that have played a role in the growth of the rating agencies.
Describe a rating scale, define credit outlooks, and explain the difference between solicited and unsolicited ratings.
Describe Standard and Poors and Moodys rating scales and distinguish between investment and noninvestment grade ratings.
Describe the difference between an issuer-pay and a subscriber-pay model and describe concerns regarding the issuer-pay model.
Describe and contrast the process for rating industrial and sovereign debt and describe how the distributions of these ratings may differ.
Describe the ratings performance for corporate bonds.
Describe the relationship between the rating agencies and regulators and identify key regulations that impact the rating agencies and the
Describe some of the trends and issues emerging from the current credit crisis relevant to the rating agencies and the use of ratings in th
Describe the risks in the commodities business that are addressed by the use of futures contracts.
Describe the key features and terms of a futures contract.
Differentiate between equity securities and futures contracts.
Define and interpret volume and open interest.
Explain the requisites for a successful futures market.
Describe the features of a modern futures exchange and identify typical contract terms and trading rules.
Explain the organization and administration of an exchange and clearinghouse.
Describe exchange membership, the different types of exchange members, and the exchange rules for member trading.
Explain original and variation margin, daily settlement, the guaranty deposit, and the clearing process.
Describe the steps that are taken when a clearinghouse member is unable to meet its financial obligations on its open contracts.
Describe the mechanics of futures delivery and the roles of the clearinghouse, buyers, and sellers in this process.
Explain the role of futures commission merchants, introducing brokers, account executives, commodity trading advisors, commodity poo
Define the terms long the basis and short the basis.
Explain exchange for physical (EFP) transactions and their role in the energy and financial futures markets.
Describe and calculate the payoffs on the various scenarios for hedging with options on futures.
nge/Deletion
2013 AIM STATEMENTS
and electronic trading.
w it differs from trading on an exchange, and its advantages and disadvantages.

and futures contracts.
contract payoffs.
ffs from hedging strategies involving forward contracts and options.
ffs from speculative strategies involving futures and options.
e how arbitrage opportunities are ephemeral.
rom the use of derivatives.
futures contract, including the asset, the contract price and size, delivery and limits.
ot prices.
ments and explain how they work.
ures transactions.
e over-the-counter market and compare it to the margining system.
ween a normal and inverted futures market.
ocess and contrast it with cash settlement.
g of the impact of different order types, including: market, limit, stop-loss, stop-limit, market-if-touched, discretionary, time-o
es contracts.
nd long hedges and identify appropriate uses.

edging and the potential impact of hedging on firm profitability.
of basis risk, and explain how basis risks arise when hedging with futures.
nterpret the minimum variance hedge ratio and hedge effectiveness.
al number of futures contracts needed to hedge an exposure, and explain and calculate the tailing the hedge adjustment.
ntracts to change a stock portfolios beta.
dge forward and describe some of the risks that arise from such a strategy.
es, and what is meant by the risk-free rate.

g daily, weekly, monthly, quarterly, semiannual, annual, and continuous compounding. Convert rates based on different comp
n paying bond using spot rates.
t of spot rates.
a forward rate agreement (FRA).
ow convexity addresses some of them.
en duration, convexity, and a change in interest rates.
tructure of interest rates.
nsumption assets.
d and futures contracts and explain the relationship between forward and spot prices.
derlying assets price, with or without short sales and/or consideration to the income or yield of the underlying asset. Describe
and futures prices.
using the interest rate parity relationship.
ience yield.
es incorporating income/storage costs and/or convenience yields.
rry model, forward prices where the underlying asset either does or does not have interim cash flows.
lable in the futures markets and how they can influence futures prices.
rpret the effect contango or backwardation may have on the relationship between commodity futures and spot prices, and re
futures prices and expected future spot prices, including the impact of
unt conventions, describe the markets that each one is typically used in, and apply each to an interest calculation.
e to a price for a U.S. Treasury bill.
price for a U.S. Treasury bond; calculate the accrued interest and dirty price on a U.S. Treasury bond.
d futures contract conversion factor.
o a Treasury bond futures contract.
e of the yield curve on the cheapest-to-deliver bond decision.
a Treasury bond futures contract.
odollar futures contract.

ures contract convexity adjustment.
ed to extend the LIBOR zero curve.
and describe a duration-based hedging strategy using interest rate futures.
-based hedging strategy.
terest rate swap and compute its cash flows.

wap can be used to transform an asset or a liability and calculate the resulting cash flows.
s in the swaps market.
swap transaction.
ment for the existence of interest rate swaps and explain some of the criticisms of this argument.
est rate swap based on two simultaneous bond positions.
est rate swap from a sequence of forward rate agreements (FRAs).
and compute its cash flows.
ment for the existence of currency swaps.
to transform an asset or liability and calculate the resulting cash flows.
sed on two simultaneous bond positions.
sed on a sequence of FRAs.
an existing swap position.
cluding commodity, volatility and exotic swaps.

la interest rate swap are computed
ons price and describe how these six factors affect the price for both European and American options.
d lower bounds for option prices.
the put-call parity on a non-dividend-paying stock, the value of aEuropean and American option, respectively.
erican call and put options on a non-dividend-paying stock and the price effect early exercise may have.
t-call parity, the bounds of put and call option prices, and the early exercise feature of American options.
all or a protective put strategy.

ions of spread strategies, including bull spread, bear spread, box spread, calendar spread, butterfly spread, and diagonal spread.
gies.
ions of combination strategies, including straddles, strangles, strips, and straps.
es.
ge costs, carry markets, lease rate, and convenience yield.

ng commodity forwards.
ty forwards, and compute the potential arbitrage profit.
mines the no-arbitrage values for commodity forwards and futures.
of storage costs and convenience yields on commodity forward prices and no-arbitrage bounds.
with storage costs.
yield.
city, natural gas, and oil forward prices.
g commodity price exposure.

ge and a stack hedge and explain how these differences impact risk management.
lly the process of hedging jet fuel with crude oil and using weather derivatives.
position, and use it to explain the relationship between the forward price and the expected future spot price.
ity spot transactions.

nary transportation risks.
nces between hedgers, speculators, and arbitrageurs.
the conditions for a market to be arbitrage-free.
.
mining the effectiveness of hedging a spot position with a futures contract, and compute and compare the effectiveness of
e for Physical agreement and an Alternative Delivery Procedure.
hey relate to liquidity and market depth.
gn exchange exposure.
its net position exposure to reduce foreign exchange risk.
lar gain or loss exposure to a particular currency.
reign exchange trading activities.
ng gains and losses.
eign currency denominated investment.
he foreign exchange markets leads to the interest rate parity theorem, and use this theorem to calculate forward foreign
sset-liability positions could reduce portfolio risk.
nd real interest rates.
le of the corporate trustee in a bond indenture.

pacts bond retirements.
classifications.
between original-issue-discount and reinvestment risk, and the treatment of zeroes in bankruptcy.
or corporate bonds, including:
nd convertible debentures)
bonds can be retired before maturity, including call provisions, sinking-fund provisions, maintenance and replacement funds, and tender
ault risk and credit spread risk.
se it in corporate bonds.
f high-yield bond issuers and some of the payment features peculiar to high yield bonds.
efault rate and a dollar default rate.
onship between recovery rates and seniority.
ancial markets.
e played a role in the growth of the rating agencies.
, and explain the difference between solicited and unsolicited ratings.
ting scales and distinguish between investment and noninvestment grade ratings.
y and a subscriber-pay model and describe concerns regarding the issuer-pay model.
ndustrial and sovereign debt and describe how the distributions of these ratings may differ.
te bonds.
agencies and regulators and identify key regulations that impact the rating agencies and the use of ratings in the market.
ging from the current credit crisis relevant to the rating agencies and the use of ratings in the market.
s that are addressed by the use of futures contracts.

res contract.
utures contracts.
st.
market.
change and identify typical contract terms and trading rules.

f an exchange and clearinghouse.
t types of exchange members, and the exchange rules for member trading.
ttlement, the guaranty deposit, and the clearing process.
ringhouse member is unable to meet its financial obligations on its open contracts.
d the roles of the clearinghouse, buyers, and sellers in this process.
ants, introducing brokers, account executives, commodity trading advisors, commodity pool operators, and customers.
the basis.
ns and their role in the energy and financial futures markets.
ous scenarios for hedging with options on futures.
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Slight Addition: calculate the net profit of a short sale of a dividend-paying stock.
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Slight Modification: Deletion of the part " treatment of zeroes in bankruptcy"
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New: Although these topics are covered under Introduction to futures but GARP has decided to introduce a new book as set o
New
New
New
New
New
New
New
New
New
New
For more info visit
Section
Weightage
Newly Added
Book
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
VaR
30%
163
8
Objectives
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Explain how asset return distribu

Explain potential reasons for the
Distinguish between conditional
Describe the implications of regi
Explain the various approaches f
Compare, contrast and calculate
Historical standard deviation
Exponential smoothing
GARCH approach
Historic simulation
Multivariate density estimation
Hybrid methods
Explain the process of return agg
Describe implied volatility as a p
Explain long horizon volatility/Va
16
17
18
19
20
21
22
Explain and give examples of line

Explain how to calculate VaR for
Describe the delta-normal appro
Describe the limitations of the de
Explain the full revaluation meth
Compare delta-normal and full r
Explain structural Monte Carlo, s
Chapter 3 ................................Putting VaR

to Work
23 Describe the implications of corr

24 Describe worst-case scenario (W
Hull, Options, Futures, and Other

Derivatives, 8th Edition.
Chapter 12...............................Binomial
Trees
25
26
27
28
29
Calculate the value of a Europea

Calculate the value of an Americ
Describe how volatility is capture
Describe how the binomial mode
Explain how the binomial model
30
31
32
33
34
35
36
37
38
Explain the lognormal property o

Compute the realized return and
List and describe the assumption
Compute the value of a Europea
Identify the complications involv
Define implied volatilities and de
Explain how dividends affect the
Compute the value of a Europea
Use Blacks Approximation to co
39
40
41
42
43
44
45
46
47
48
49
Describe and assess the risks ass

Explain how naked and covered
Describe delta hedging for an op
Compute delta for an option.
Describe the dynamic aspects of
Define the delta of a portfolio.
Define and describe theta, gamm
Explain how to implement and m
Describe how hedging activities t
Describe how portfolio insurance
Chapter 14...............................The BlackScholes-Merton Model
Chapter 18...............................The Greek

Letters
Bruce Tuckman, Fixed Income Securities,

3rd Edition (Hoboken, NJ: John Wiley &
Sons, 2011).
Chapter 1 .................................Prices,
Discount Factors, and Arbitrage
50
51
52
53
54
55
56
Define discount factor and use a

Define the law of one price, ex
Identify the components of a U.S
Construct a replicating portfolio
Identify arbitrage opportunities f
Differentiate between clean an
Describe the common day-count
57
58
59
60
61
62
63
64
Calculate and describe the impac

Calculate discount factors given
Compute spot rates given discou
Define and interpret the forward
Define par rate and describe the
Interpret the relationship betwe
Assess the impact of maturity on
Define the flattening and stee
65
66
67
68
69
70
71
72
73
Distinguish between gross and n

Define and interpret the spread
Define, interpret, and apply a bo
Compute a bond's YTM given a b
Calculate the price of an annuity
Explain the relationship between
Define the coupon effect and exp
Explain the decomposition of P&
Identify the most common assum
Chapter 2 ................................Spot,
Forward and Par Rates
Chapter 3 ................................Returns,
Spreads and Yields
Chapter 4 ................................One-Factor
Risk Metrics and Hedges
74
75
76
77
78
79
80
81
82
Describe an interest rate factor a

Define and compute the DV01 o
Calculate the face amount of bon
Define, compute, and interpret t
Compare and contrast DV01 and
Define, compute, and interpret t
Explain the process of calculating
Explain the impact of negative co
Construct a barbell portfolio to m
83
84
85
86
87
88
89
90
91
Describe and assess the major w

Define key rate exposures and kn
Describe key-rate shift analysis.
Define, calculate, and interpret k
Describe the key rate exposure t
Calculate the key rate exposures
Construct an appropriate hedge
Explain how key rate and multi-f
92
93
94
95
96
97
98
Explain the drawbacks to using a

Describe a regression hedge and
Calculate the regression hedge a
Calculate the face value of an off
Calculate the face value of multi
Compare and contrast between
Describe principal component an
Chapter 5 ................................Multi-Factor
Risk Metrics and Hedges
Chapter 6 ................................Empirical
Approaches to Risk Metrics and Hedging
Caouette, Altman, Narayanan, and Nimmo,

Managing Credit Risk, 2nd Edition. (New
York: John Wiley & Sons, 2008).
Chapter 23 ..............................Country Risk
Models
99 Define and differentiate betwee
100
101
102
103
104
105
Describe country risk in a historic

Identify and describe some of th
Compare and contrast corporate
Explain approaches for and chall
Describe how country risk rating
Describe some of the challenges
106
107
108
109
110
111
112
113
Describe external rating scales, t

Describe the impact of time hori
Review the results and explanati
Compare external and internal ra
Explain and compare the through
Define and explain a ratings tran
Describe the process for and issu
Identify and describe the biases
114
115
116
117
118
119
120
121
122
123
124
Describe the objectives of measu

Define, calculate and interpret th
Distinguish between loan and bo
Explain how a credit downgrade
Distinguish between expected an
Define exposures, adjusted expo
Explain how drawn and undraw
Explain how covenants impact
Define usage given default and h
Explain the concept of credit opt
Describe the process of paramet
Arnaud de Servigny and Olivier Renault,

Measuring and Managing Credit Risk (New
York: McGraw-Hill, 2004).
Chapter 2 ................................External and
Internal Ratings
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
125
126
127
128
Explain the objective for quantify

Describe factors contributing to
Define, calculate and interpret th
Explain the relationship between
129
130
131
132
133
134
135
136
Describe the mean-variance fram

Explain the limitations of the me
Define the Value-at-Risk (VaR) m
Define the properties of a cohere
Explain why VaR is not a coheren
Explain and calculate expected s
Describe spectral risk measures,
Describe how the results of scen
Kevin Dowd, Measuring Market Risk, 2nd

Edition (West Sussex, England: John Wiley
& Sons, 2005).
Chapter 2 ................................Measures of
Financial Risk
John Hull, Risk Management and Financial Please note here that the John Hull version 3is being used f
Institutions, 3rd Edition (Boston: Pearson
Prentice Hall, 2012).
Chapter 20 ...............................Operational
Risk
137
138
139
140
141
142
143
144
145
Calculate the regulatory capital u

Explain the Basel Committees re
Explain how to get a loss distribu
Describe the common data issue
Describe how to use scenario an
Describe how to identify causal r
Describe the allocation of operat
Explain how to use the power law
Explain the risks of moral hazard
Jorion, Value-at-Risk: The New Benchmark

for Managing Financial Risk, 3rd Edition.
Chapter 14...............................Stress
Testing
146
147
148
149
150
151
152
153
154
Describe the purposes of stress t

Contrast between event-driven s
Identify common one-variable se
Describe the Standard Portfolio A
Describe the drawbacks to scena
Explain the difference between u
Compare and contrast various ap
Define and distinguish between
Explain how the results of a stres
155
156
157
158
159
160
161
162
163
164
Describe the rationale for the us

Describe weaknesses identified a
The use of stress testing and in
Stress testing methodologies
Stress testing scenarios
Stress testing handling of speci
Describe stress testing principles
Use of stress testing and integr
Stress testing methodology and
Principles for supervisors
Principles for Sound Stress Testing

Practices and Supervision (Basel
Committee on Banking Supervision
Publication, May 2009).
Added Readings
Daniel Wagner, Managing Country Risk: A

Practitioners Guide to Effective CrossBorder Risk Analysis
(Boca Raton, FL: Taylor & Francis Group,
2012).
Chapter 3 ................................Assessing
Country Risk
165
166
167
168
Identify characteristics and guide

Identify key indicators used by ra
Describe factors which are likely
Apply basic country risk analysis
169
170
171
172
Explain key considerations when

Describe a process for generatin
Describe qualitative and quantita
Describe alternative measures an
Chapter 4 ................................Country Risk

Assessment in Practice
dpress.com/
Added/New Objective
Slight Modification
2013 AIM STATEMENTS
Explain how asset return distributions tend to deviate from the normal distribution.
Explain potential reasons for the existence of fat tails in a return distribution and describe the implications fat tails have on analysis of re
Distinguish between conditional and unconditional distributions.
Describe the implications of regime switching on quantifying volatility.
Explain the various approaches for estimating VaR.
Compare, contrast and calculate parametric and non-parametric approaches for estimating conditional volatility, including:
Historical standard deviation
Exponential smoothing
GARCH approach
Historic simulation
Multivariate density estimation
Hybrid methods
Explain the process of return aggregation in the context of volatility forecasting methods.
Describe implied volatility as a predictor of future volatility and its shortcomings.
Explain long horizon volatility/VaR and the process of mean reversion according to an AR(1) model.
Explain and give examples of linear and non-linear derivatives.

Explain how to calculate VaR for linear derivatives.
Describe the delta-normal approach to calculating VaR for non-linear derivatives.
Describe the limitations of the delta-normal method.
Explain the full revaluation method for computing VaR.
Compare delta-normal and full revaluation approaches.
Explain structural Monte Carlo, stress testing and scenario analysis methods for computing VaR, identifying strengths and weaknesses of
Describe the implications of correlation breakdown for scenario analysis.

Describe worst-case scenario (WCS) analysis and compare WCS to VaR.
Calculate the value of a European call or put option using the one-step and two-step binomial model.
Calculate the value of an American call or put option using a two-step binomial model.
Describe how volatility is captured in the binomial model.
Describe how the binomial model value converges as time periods are added.
Explain how the binomial model can be altered to price options on: stocks with dividends, stock indices, currencies, and futures.
Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return.
Compute the realized return and historical volatility of a stock.
List and describe the assumptions underlying the Black-Scholes-Merton option pricing model.
Compute the value of a European option using the Black-Scholes-Merton model on a non dividend paying stock.
Identify the complications involving the valuation of warrants.
Define implied volatilities and describe how to compute implied volatilities from market prices of options using the Black-Scholes-Merton
Explain how dividends affect the early decision for American call and put options.
Compute the value of a European option using the Black-Scholes-Merton model on a dividend paying stock.
Use Blacks Approximation to compute the value of an American call option on a dividend-paying stock.
Describe and assess the risks associated with naked and covered option positions.
Explain how naked and covered option positions generate a stop loss trading strategy.
Describe delta hedging for an option, forward, and futures contracts.
Compute delta for an option.
Describe the dynamic aspects of delta hedging.
Define the delta of a portfolio.
Define and describe theta, gamma, vega, and rho for option positions.
Explain how to implement and maintain a gamma neutral position.
Describe the relationship between delta, theta, and gamma.
Describe how hedging activities take place in practice, and describe how scenario analysis can be used to formulate expected gains and lo
Describe how portfolio insurance can be created through option instruments and stock index futures.
Define discount factor and use a discount function to compute present and future values.
Define the law of one price, explain it using an arbitrage argument, and describe how it can be applied to bond pricing.
Identify the components of a U.S. Treasury coupon bond, and compare and contrast the structure to Treasury STRIPS, including the differ
Construct a replicating portfolio using multiple fixed income securities to match the cash flows of a given fixed income security.
Identify arbitrage opportunities for fixed income securities with certain cash flows.
Differentiate between clean and dirty bond pricing and explain the implications of accrued interest with respect to bond pricing.
Describe the common day-count conventions used in bond pricing.
Calculate and describe the impact of different compounding frequencies on a bonds value.
Calculate discount factors given interest rate swap rates.
Compute spot rates given discount factors.
Define and interpret the forward rate, and compute forward rates given spot rates.
Define par rate and describe the equation for the par rate of a bond.
Interpret the relationship between spot, forward and par rates.
Assess the impact of maturity on the price of a bond and the returns generated by bonds.
Define the flattening and steepening of rate curves and construct a hypothetical trade to reflect expectations that a curve will flatten
Distinguish between gross and net realized returns, and calculate the realized return for a bond over a holding period including reinvestm
Define and interpret the spread of a bond, and explain how a spread is derived from a bond price and a term structure of rates.
Define, interpret, and apply a bonds yield-to-maturity (YTM) to bond pricing.
Compute a bond's YTM given a bond structure and price.
Calculate the price of an annuity and a perpetuity.
Explain the relationship between spot rates and YTM.
Define the coupon effect and explain the relationship between coupon rate, YTM, and bond prices.
Explain the decomposition of P&L for a bond into separate factors including carry roll-down, rate change and spread change effects.
Identify the most common assumptions in carry roll-down scenarios, including realized forwards, unchanged term structure, and unchan
Describe an interest rate factor and identify common examples of interest rate factors.
Define and compute the DV01 of a fixed income security given a change in yield and the resulting change in price.
Calculate the face amount of bonds required to hedge an option position given the DV01 of each.
Define, compute, and interpret the effective duration of a fixed income security given a change in yield and the resulting change in price.
Compare and contrast DV01 and effective duration as measures of price sensitivity.
Define, compute, and interpret the convexity of a fixed income security given a change in yield and the resulting change in price.
Explain the process of calculating the effective duration and convexity of a portfolio of fixed income securities.
Explain the impact of negative convexity on the hedging of fixed income securities.
Construct a barbell portfolio to match the cost and duration of a given bullet investment, and explain the advantages and disadvantages
Describe and assess the major weakness attributable to single-factor approaches when hedging portfolios or implementing asset liability
Define key rate exposures and know the characteristics of key rate exposure factors including partial 01s and forward-bucket 01s.
Describe key-rate shift analysis.
Define, calculate, and interpret key rate 01 and key rate duration.
Describe the key rate exposure technique in multi-factor hedging applications and summarize its advantages and disadvantages.
Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a specific key rate exposure p
Describe the relationship between key rates, partial '01s and forward-bucket 01s, and calculate the forward-bucket 01 for a shift in rate
Construct an appropriate hedge for a position across its entire range of forward bucket exposures.
Explain how key rate and multi-factor analysis may be applied in estimating portfolio volatility.
Explain the drawbacks to using a DV01-neutral hedge for a bond position.

Describe a regression hedge and explain how it improves on a standard DV01-neutral hedge.
Calculate the regression hedge adjustment factor, beta.
Calculate the face value of an offsetting position needed to carry out a regression hedge.
Calculate the face value of multiple offsetting swap positions needed to carry out a two-variable regression hedge.
Compare and contrast between level and change regressions.
Describe principal component analysis and explain how it is applied in constructing a hedging portfolio.
Define and differentiate between country risk and transfer risk and describe some of the factors that might lead to each.
Describe country risk in a historical context.

Identify and describe some of the major risk factors that are relevant for sovereign risk analysis.
Compare and contrast corporate and sovereign historical default rate patterns.
Explain approaches for and challenges in assessing country risk.
Describe how country risk ratings are used in lending and investment decisions.
Describe some of the challenges in country risk analysis.
Describe external rating scales, the rating process, and the link between ratings and default.
Describe the impact of time horizon, economic cycle, industry, and geography on external ratings.
Review the results and explanation of the impact of ratings changes on bond and stock prices.
Compare external and internal ratings approaches.
Explain and compare the through-the-cycle and at-the-point internal ratings approaches.
Define and explain a ratings transition matrix and its elements.
Describe the process for and issues with building, calibrating and backtesting an internal rating system.
Identify and describe the biases that may affect a rating system.
Describe the objectives of measuring credit risk for a banks loan portfolio.
Define, calculate and interpret the expected loss for an individual credit instrument.
Distinguish between loan and bond portfolios.
Explain how a credit downgrade or loan default affects the return of a loan.
Distinguish between expected and unexpected loss.
Define exposures, adjusted exposures, commitments, covenants, and outstandings:
Explain how drawn and undrawn portions of a commitment affect exposure
Explain how covenants impact exposures
Define usage given default and how it impacts expected and unexpected loss.
Explain the concept of credit optionality.
Describe the process of parameterizing credit risk models and its challenges.
Explain the objective for quantifying both expected and unexpected loss.
Describe factors contributing to expected and unexpected loss.
Define, calculate and interpret the unexpected loss of an asset.
Explain the relationship between economic capital, expected loss and unexpected loss.
Describe the mean-variance framework and the efficient frontier.

Explain the limitations of the mean-variance framework with respect to assumptions about the return distributions.
Define the Value-at-Risk (VaR) measure of risk, describe assumptions about return distributions and holding period, and explain the limit
Define the properties of a coherent risk measure and explain the meaning of each property.
Explain why VaR is not a coherent risk measure.
Explain and calculate expected shortfall (ES), and compare and contrast VaR and ES.
Describe spectral risk measures, and explain how VaR and ES are special cases of spectral risk measures.
Describe how the results of scenario analysis can be interpreted as coherent risk measures.
ull version 3is being used for 2014 as compared to 2nd version in 2013. Chapter 20 in 3rd version correspon
Calculate the regulatory capital using the basic indicator approach and the standardised approach.
Explain the Basel Committees requirements for the advanced measurement approach (AMA) and their seven categories of operational r
Explain how to get a loss distribution from the loss frequency distribution and the loss severity distribution using Monte Carlo simulation
Describe the common data issues that can introduce inaccuracies and biases in the estimation of loss frequencyand severity distributions
Describe how to use scenario analysis in instances when there is scarce data.
Describe how to identify causal relationships and how to use risk and control self assessment (RCSA) and key risk indicators (KRIs) to mea
Describe the allocation of operational risk capital and the use of scorecards.
Explain how to use the power law to measure operational risk.
Explain the risks of moral hazard and adverse selection when using insurance to mitigate operational risks.
Describe the purposes of stress testing and the process of implementing a stress testing scenario.
Contrast between event-driven scenarios and portfolio-driven scenarios.
Identify common one-variable sensitivity tests.
Describe the Standard Portfolio Analysis of Risk (SPAN) system for measuring portfolio risk.
Describe the drawbacks to scenario analysis.
Explain the difference between unidimensional and multidimensional scenarios.
Compare and contrast various approaches to scenario analysis.
Define and distinguish between sensitivity analysis and stress testing model parameters.
Explain how the results of a stress test can be used to improve our risk analysis and risk management systems.
Describe the rationale for the use of stress testing as a risk management tool.
Describe weaknesses identified and recommendations for improvement in:
The use of stress testing and integration in risk governance
Stress testing methodologies
Stress testing scenarios
Stress testing handling of specific risks and products.
Describe stress testing principles for banks within:
Use of stress testing and integration in risk governance
Stress testing methodology and scenario selection
Principles for supervisors
Identify characteristics and guidelines leading to effective country risk analysis.

Identify key indicators used by rating agencies to analyze a countrys debt and political risk, and describe challenges faced by country risk
Describe factors which are likely to influence the political stability and economic openness within a country.
Apply basic country risk analysis in comparing two countries as illustrated in the case study.
Explain key considerations when developing and using analytical tools to assess country risk.
Describe a process for generating a ranking system and selecting risk management tools to compare the risk among countries.
Describe qualitative and quantitative factors that can be used to assess country risk.
Describe alternative measures and indices that can be useful in assessing country risk.
2013 AIM STATEMENTS
iate from the normal distribution.

ails in a return distribution and describe the implications fat tails have on analysis of return distributions.
l distributions.
quantifying volatility.
.
on-parametric approaches for estimating conditional volatility, including:
ontext of volatility forecasting methods.

volatility and its shortcomings.
s of mean reversion according to an AR(1) model.
derivatives.
VaR for non-linear derivatives.

od.
VaR.
ches.
scenario analysis methods for computing VaR, identifying strengths and weaknesses of each approach.
n for scenario analysis.

ompare WCS to VaR.
n using the one-step and two-step binomial model.

on using a two-step binomial model.
model.
as time periods are added.
price options on: stocks with dividends, stock indices, currencies, and futures.
e distribution of rates of return, and the calculation of expected return.

ty of a stock.
Black-Scholes-Merton option pricing model.
e Black-Scholes-Merton model on a non dividend paying stock.
of warrants.
mpute implied volatilities from market prices of options using the Black-Scholes-Merton model.
American call and put options.
e Black-Scholes-Merton model on a dividend paying stock.
of an American call option on a dividend-paying stock.
d and covered option positions.

enerate a stop loss trading strategy.
d futures contracts.
for option positions.

neutral position.
d gamma.
tice, and describe how scenario analysis can be used to formulate expected gains and losses with option positions.
hrough option instruments and stock index futures.
to compute present and future values.

rbitrage argument, and describe how it can be applied to bond pricing.
n bond, and compare and contrast the structure to Treasury STRIPS, including the difference between P-STRIPS and C-STRIPS.
ed income securities to match the cash flows of a given fixed income security.
ecurities with certain cash flows.
icing and explain the implications of accrued interest with respect to bond pricing.
d in bond pricing.
mpounding frequencies on a bonds value.

p rates.
te forward rates given spot rates.

par rate of a bond.
and par rates.
nd and the returns generated by bonds.
urves and construct a hypothetical trade to reflect expectations that a curve will flatten or steepen.
s, and calculate the realized return for a bond over a holding period including reinvestments.
plain how a spread is derived from a bond price and a term structure of rates.
urity (YTM) to bond pricing.
d price.
TM.
hip between coupon rate, YTM, and bond prices.
separate factors including carry roll-down, rate change and spread change effects.
oll-down scenarios, including realized forwards, unchanged term structure, and unchanged yields
mon examples of interest rate factors.

ecurity given a change in yield and the resulting change in price.
edge an option position given the DV01 of each.
ion of a fixed income security given a change in yield and the resulting change in price.
n as measures of price sensitivity.
fixed income security given a change in yield and the resulting change in price.
ation and convexity of a portfolio of fixed income securities.
edging of fixed income securities.
d duration of a given bullet investment, and explain the advantages and disadvantages of bullet versus barbell portfolios.
ble to single-factor approaches when hedging portfolios or implementing asset liability techniques.
istics of key rate exposure factors including partial 01s and forward-bucket 01s.
ey rate duration.
-factor hedging applications and summarize its advantages and disadvantages.
ty, and compute the appropriate hedging positions given a specific key rate exposure profile.
al '01s and forward-bucket 01s, and calculate the forward-bucket 01 for a shift in rates in one or more buckets.
oss its entire range of forward bucket exposures.
y be applied in estimating portfolio volatility.
dge for a bond position.

proves on a standard DV01-neutral hedge.
beta.
eeded to carry out a regression hedge.
p positions needed to carry out a two-variable regression hedge.
regressions.
how it is applied in constructing a hedging portfolio.
transfer risk and describe some of the factors that might lead to each.
rs that are relevant for sovereign risk analysis.

storical default rate patterns.
country risk.
ng and investment decisions.
alysis.
and the link between ratings and default.

cle, industry, and geography on external ratings.
of ratings changes on bond and stock prices.
.
-the-point internal ratings approaches.
ts elements.
calibrating and backtesting an internal rating system.
rating system.
r a banks loan portfolio.

or an individual credit instrument.
fects the return of a loan.

s.
nts, covenants, and outstandings:
ommitment affect exposure
ected and unexpected loss.
models and its challenges.
d and unexpected loss.

xpected loss.
s of an asset.
l, expected loss and unexpected loss.
ficient frontier.
ework with respect to assumptions about the return distributions.
scribe assumptions about return distributions and holding period, and explain the limitations of VaR.
and explain the meaning of each property.
compare and contrast VaR and ES.

VaR and ES are special cases of spectral risk measures.
be interpreted as coherent risk measures.
mpared to 2nd version in 2013. Chapter 20 in 3rd version corresponds to Chapter 18 in 2nd Version
icator approach and the standardised approach.

he advanced measurement approach (AMA) and their seven categories of operational risk.
s frequency distribution and the loss severity distribution using Monte Carlo simulations.
ce inaccuracies and biases in the estimation of loss frequencyand severity distributions.
when there is scarce data.
how to use risk and control self assessment (RCSA) and key risk indicators (KRIs) to measure and manage operational risks.
and the use of scorecards.
rational risk.
ction when using insurance to mitigate operational risks.
ocess of implementing a stress testing scenario.

folio-driven scenarios.
PAN) system for measuring portfolio risk.
d multidimensional scenarios.
ario analysis.
s and stress testing model parameters.
d to improve our risk analysis and risk management systems.
as a risk management tool.

ions for improvement in:
overnance
ucts.
rnance
on
ffective country risk analysis.

analyze a countrys debt and political risk, and describe challenges faced by country risk analysts in using external agency ratings.
political stability and economic openness within a country.
countries as illustrated in the case study.
sing analytical tools to assess country risk.

m and selecting risk management tools to compare the risk among countries.
can be used to assess country risk.
n be useful in assessing country risk.
nd Version
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Deletion: The prescribed book and AIM statements have been revised. Please see at the bottom for "Added Readings" whe
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Foundations of Risk Management

Risk Taking: A Corporate Governance

Define risk, identify the classifica

Define risk, identify the classif

Describe the impact of leverage

Edwin J. Elton, Martin J. Gruber, Stephen J.

Calculate the expected return

Understand the derivation an

Define beta and calculate the be

Edwin J. Elton, Martin J. Gruber, Stephen J.

Describe the impact on the CA

Calculate, compare, and evalu

Anthony Tarantino and Deborah

Describe ways in which a busi

Describe the key factors that l

Ren Stulz, Risk Management Failures:

Define the role of risk manage

Explain the role of risk metrics

Describe the responsibility of

Define risk appetite and explain

Zvi Bodie, Alex Kane, and Alan J. Marcus,

Describe the inputs, including fac

2013 AIM STATEMENTS

Calculate the expected return and volatility of a portfolio of risky assets.

Understand the derivation and components of the CAPM.

Describe the impact on the CAPM of the following:

Describe the inputs, including factor betas, to a multi factor model.

2013 AIM STATEMENTS

, and explain the role played by risk in value creation.

isks, and explain the role played by risk in value creation

he calculation of an equity beta for a firm.

ty of a portfolio of risky assets.

the impact on it of various assumptions concerning short sales and borrowing.

nts of the CAPM.

ynor measure, the Sharpe measure, and Jensens alpha.

negatively impacted by poor quality data.

he lessons learned from the following risk management case studies:

xplain why a large financial loss is not necessarily a failure of risk

and unknown risks into account in making strategic decisions.

be the shortcomings of existing risk metrics.

k appetite in corporate governance.

a multi factor model.

2014 AIM MODIFICATION

that can be used in each stage of the process.

ative methods used to estimate risks and describe examples of each.

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Michael Miller, Mathematics and Statistics

Describe the concept of probabil

Define, calculate, and interpre

Describe and distinguish betw

16 Define and distinguish betwee

Describe the key properties of

Define, calculate and interpre

Explain how regression analys

James Stock and Mark Watson,

Define, calculate, and interpre

Define, interpret, and describ

58 Construct, perform, and interp

Define, calculate, and interpre

Philippe Jorion, Value-at-Risk:The New

Describe how to simulate a price

Explain how historical data and v