FRM Part 1 Changes from 2019 to 2020

FRM Part 1 Changes from 2019 to 2020

Here are the major changes for FRM part 1 for 2020:

Book 1 – Foundations of Risk Management

Chapter 1: The Building Blocks of Risk Management

(Previously: Risk Management: A Helicopter View)

  • ADDED: Explain how risk factors can interact with each other and describe challenges in aggregating
    risk exposures.

Chapter 2: How Do Firms Manage Financial Risk?

(Previously: Corporate Risk Management: A Primer)

  • ADDED: Compare different strategies a firm can use to manage its risk exposures and explain situations in which a firm would want to use each strategy.
  • ADDED: Explain the relationship between risk appetite and a firm’s risk management decisions.

(Plus some slight changes in learning objectives, but basically the same content)

Chapter 3: The Governance of Risk Management

(Previously: Corporate Governance and Risk Management)

  • ADDED: Explain changes in corporate risk governance that occurred as a result of the 2007-2009 financial crisis.
  • DELETED: Distinguish the different mechanisms for transmitting risk governance throughout an organization.

Chapter 4: Credit Risk Transfer Mechanisms

*New Chapter*

  • Compare different types of credit derivatives, explain how each one transfers credit risk and describe their advantages and disadvantages.
  • Explain different traditional approaches or mechanisms that firms can use to help mitigate credit risk.
  • Evaluate the role of credit derivatives in the 2007-2009 financial crisis and explain changes in the credit derivative market that occurred as a result of the crisis.
  • Explain the process of securitization, describe a special purpose vehicle (SPV) and assess the risk of different business models that banks can use for securitized products.

Chapter 5: Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)

(Previously: The Capital Asset Pricing Model & Applying the CAPM to Performance Measurement)

  • ADDED: Explain modern portfolio theory and interpret the Markowitz efficient frontier.

Chapter 6: Arbitrage Pricing Theory and Multifactor Models of Risk and Return

(Previously: Multifactor Models of Risk-Adjusted Asset Returns)

  • ADDED: Explain the arbitrage pricing theory (APT), describe its assumptions and compare the APT to the CAPM.
  • ADDED: Explain models that account for correlations between asset returns in a multi-asset portfolio.

Chapter 7: Risk Data Aggregation and Reporting Principles

(Previously: Principles for Effective Risk Data Aggregation and Risk Reporting)


Chapter 8: Enterprise Risk Management and Future Trends

(Previously: What is ERM?)

  • ADDED: Explain best practices for the governance and implementation of an ERM program.
  • ADDED: Describe important dimensions of an ERM program and relate ERM to strategic planning.
  • ADDED: Describe risk culture, explain characteristics of a strong corporate risk culture and describe challenges to the establishment of a strong risk culture at a firm.
  • ADDED: Explain the role of scenario analysis in the implementation of an ERM program and describe its advantages and disadvantages.
  • ADDED: Explain the use of scenario analysis in stress testing programs and in capital planning.

Chapter 9: Learning From Financial Disasters

(Previously: Financial Disasters)

Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

  • ADDED: 1980s savings and loan crisis in the US
  • ADDED: Lehman Brothers, Continental Illinois and Northern Rock
  • ADDED: Niederhoffer case and the London Whale case
  • ADDED:  Orange County case, and Sachsen Landesbank
  • ADDED: Volkswagen case
  • ADDED: SWIFT case
  • DELETED: Kidder Peabody
  • DELETED: Allied Irish Bank
  • DELETED: Union Bank of Switzerland (UBS)
  • DELETED: Société Générale
  • DELETED: JPMorgan
  • DELETED: Citigroup

Chapter 10: Anatomy of the Great Financial Crisis of 2007-2009

(Previously: Getting up to Speed on the Financial Crisis)

  • ADDED: Explain the role of subprime mortgages and collateralized debt obligations (CDOs) in the crisis.
  • ADDED: Compare the roles of different types of institutions in the financial crisis, including banks, financial intermediaries, mortgage brokers and lenders and rating agencies.
  • ADDED: Describe trends in the short-term wholesale funding markets that contributed to the financial crisis, including their impact on systemic risk.
  • DELETED: Assess the consequences of the Lehman failure on the global financial markets.

Chapter 11: Code of Conduct


Book 2 – Quantitative Analysis

Chapter 1: Fundamentals of Probability

(Previously: Probabilities)

  • ADDED: Describe an event and an event space.
  • ADDED: Explain the difference between independent events and conditionally independent events.
  • ADDED: Explain and apply Bayes’ rule. (From previous chapter 4)
  • DELETED: Define joint probability, describe a probability matrix, and calculate joint probabilities using probability matrices. (Moved to another chapter)
  • DELETED: Define and distinguish between the probability density function, the cumulative distribution function, and the inverse cumulative distribution function. (Moved to chapter 2)

Chapter 2: Random Variables

(Previously: Basic Statistics)

  • ADDED: Describe and distinguish a probability mass function from a cumulative distribution function and explain the relationship between these two.
  • ADDED: Explain the differences between a probability mass function and a probability density function.
  • ADDED: Characterize the quantile function and quantile-based estimators.
  • ADDED: Explain the effect of a linear transformation of a random variable on the mean, variance, standard deviation, skewness, kurtosis, median and interquartile range.

Chapter 3: Common Univariate Random Variables

(Previously: Distributions)

  • DELETED: Describe the central limit theorem and the implications it has when combining independent and identically distributed (i.i.d.) random variables.
  • DELETED: Describe (i.i.d.) random variables and the implications of the i.i.d. assumption when combining random variables.

Chapter 4: Common Univariate Random Variables


  • ADDED: Explain how a probability matrix can be used to express a probability mass function.
  • ADDED: Compute the marginal and conditional distributions of a discrete bivariate random variable.
  • ADDED: Explain how the expectation of a function is computed for a bivariate discrete random variable.
  • ADDED: Define covariance and explain what it measures.
  • ADDED: Explain the relationship between the covariance and correlation of two random variables and how these are related to the independence of the two variables.
  • ADDED: Explain the effects of applying linear transformations on the covariance and correlation between two random variables.
  • ADDED: Compute the variance of a weighted sum of two random variables.
  • ADDED: Compute the conditional expectation of a component of a bivariate random variable.
  • From previous chapter 3: Describe the features of an iid sequence of random variables.
    From previous chapter 3: Explain how the iid property is helpful in computing the mean and variance of a sum of iid random variables.

Chapter 5: Sample Moments

New Chapter

  • ADDED: Estimate the mean, variance and standard deviation using sample data. (Was previously in Hypothesis Testing and Confidence Intervals)
  • ADDED: Explain the difference between a population moment and a sample moment.
  • ADDED: Distinguish between an estimator and an estimate.
  • ADDED: Describe the bias of an estimator and explain what the bias measures.
  • ADDED: Explain what is meant by the statement that the mean estimator is BLUE.
  • ADDED: Describe the consistency of an estimator and explain the usefulness of this concept.
  • ADDED: Explain how the Law of Large Numbers (LLN) and Central Limit Theorem (CLT) apply to the sample mean.
  • ADDED: Estimate and interpret the skewness and kurtosis of a random variable.
  • ADDED: Use sample data to estimate quantiles, including the median.
  • ADDED: Estimate the mean of two variables and apply the CLT.
  • ADDED: Estimate the covariance and correlation between two random variables.
  • ADDED: Explain how coskewness and cokurtosis are related to skewness and kurtosis.

Chapter 6: Hypothesis Testing

(Previously: Hypothesis Testing and Confidence Intervals)

  • ADDED: Identify the steps to test a hypothesis about the difference between two population means.
  • ADDED: Explain the problem of multiple testing and how it can bias results.

Chapter 7: Linear Regression

(Previously: Linear Regression with One Regressor & Regression with a Single Regressor)

  • ADDED: Describe the models which can be estimated using linear regression and differentiate them from those which cannot.

Chapter 8: Regression with Multiple Explanatory Variables

(Previously: Linear Regressions with Multiple Regressors & Hypothesis Tests and Confidence Interval in Multiple Regression)

  • DELETED: Describe homoskedasticity and heteroskedasticity in a multiple regression. (Goes in Chapter 9)
  • DELETED: Explain the concepts of imperfect and perfect multicollinearity and their implications. (Goes in Chapter 9)

Chapter 9: Regression Diagnostics

(Previously: From a few past chapters)

  • From Linear Regression with Multiple Regressors: Explain how to test whether a regression is affected by heteroskedasticity. (From Linear Regression with Multiple Regressors)
  • From Linear Regression with Multiple Regressors: Describe approaches to using heteroskedastic data. (From Linear Regression with Multiple Regressors)
  • From Linear Regression with Multiple Regressors: Characterize multicollinearity and its consequences; distinguish between multicollinearity and perfect collinearity. ()
  • ADDED: Describe the consequences of excluding a relevant explanatory variable from a model and contrast those with the consequences of including an irrelevant regressor.
  • ADDED: Explain two model selection procedures and how these relate to the bias-variance trade-off.
  • ADDED: Describe the various methods of visualizing residuals and their relative strengths.
  • ADDED: Describe methods for identifying outliers and their impact.
  • ADDED: Determine the conditions under which OLS is the best linear unbiased estimator.

Chapter 10: Stationary Time Series

(Previously: Characterizing Cycles & Modeling Cycles: MA, AR, and ARMA Models)

  • ADDED: Explain mean reversion and calculate a mean-reverting level. (From Volatility)
  • ADDED: Explain how seasonality is modeled in a covariance-stationary ARMA.
  • DELETED: Describe Wold’s theorem.

Chapter 11: Nonstationary Time Series

(Previously: Modeling and Forecasting Trend & Modeling and Forecasting Seasonality)

  • ADDED: Describe a random walk and a unit root.
    ADDED: Explain the challenges of modeling time series containing unit roots.
    ADDED: Describe how to test if a time series contains a unit root.
    ADDED: Calculate the estimated trend value and form an interval forecast for a time series.
  • DELETED: Compare and evaluate model selection criteria, including mean squared error (MSE), s2, the Akaike information criterion (AIC), and the Schwarz information criterion (SIC).
  • DELETED: Explain the necessary conditions for a model selection criterion to demonstrate consistency.

Chapter 12: Measuring Return, Volatility, and Correlation

(Previously: Volatility & Correlations and Copulas)

  • ADDED: Calculate, distinguish and convert between simple and continuously compounded returns.
  • ADDED: Describe how the first two moments may be insufficient to describe non-normal distributions.
  • ADDED: Explain how the Jarque-Bera test is used to determine whether returns are normally distributed.


  • Explain how various weighting schemes can be used in estimating volatility.
  • Apply the exponentially weighted moving average (EWMA) model to estimate volatility.
  • Describe the generalized autoregressive conditional heteroskedasticity (GARCH(p,q)) model for estimating volatility and its properties.
  • Calculate volatility using the GARCH(1,1) model.
  • Explain mean reversion and how it is captured in the GARCH(1,1) model.
  • Explain the weights in the EWMA and GARCH(1,1) models.
  • Explain how GARCH models perform in volatility forecasting.
  • Describe the volatility term structure and the impact of volatility changes.

Chapter 13: Simulation and Bootstrapping

(Previously: Simulation Methods)

  • DELETED: Explain how to use control variates to reduce Monte Carlo sampling error and when it is effective.
  • DELETED: Describe the benefits of reusing sets of random number draws across Monte Carlo experiments and how to reuse them.

Book 3 – Financial Markets and Products (Exam Weight: 30%)

Chapter 1: Banks

(Previously: Banks)

  • ADDED: Summarize Basel Committee regulations for regulatory capital and their motivations.

Chapter 2: Insurance Companies and Pension Plans

(Previously: Insurance Companies and Pension Plans)


Chapter 3: Fund Management

(Previously: Mutual Funds and Hedge Funds)


Chapter 4: Introduction to Derivatives

(Previously: Introduction – Options, Futures, and Other Derivatives)

  • ADDED: Define derivatives, describe features and uses of derivatives and compare linear and non-linear derivatives.

Chapter 5: Exchanges and OTC Markets

(Previously: Exchanges, OTC Derivatives, DPCs and SPVs & Basic Principals of Central Clearing)

  • ADDED: Describe netting and describe a netting process. (From another chapter)
  • ADDED: Describe the implementation of a margining process and explain the determinants of initial and variation margin requirements. (From another chapter)
  • ADDED: Describe the role of collateralization in the over-the-counter market and compare it to the margining system.
  • ADDED: Explain the use of special purpose vehicles (SPVs) in the OTC derivatives market.

Chapter 6: Central Clearing

(Previously: Basic Principals of Central Clearing & Risks Caused by CCPs: Risks Faced by CCPs)

  • ADDED: Describe the role of CCPs and distinguish between bilateral and centralized clearing. (From Exchanges, OTC Derivatives, DPCs, and SPVs)
  • ADDED: Explain regulatory initiatives for the OTC derivatives market and their impact on central clearing.
  • DELETED: Identify and evaluate lessons learned from prior CCP failures

Chapter 7: Futures Markets

(Previously: Mechanics of Futures Markets)

  • ADDED: Describe the application of marking to market and hedge accounting for futures.
  • DELETED: Describe the role of central counterparties (CCPs) and distinguish between bilateral and centralized clearing.
  • DELETED: Describe the role of collateralization in the over-the-counter market and compare it to the margining system.

Chapter 8: Using Futures for Hedging

(Previously: Hedging Strategies using Futures)


Chapter 9: Foreign Exchange Markets

(New Reading)


  • Explain and describe the mechanics of spot quotes, forward quotes and futures quotes in the foreign
    exchange markets and distinguish between bid and ask exchange rates.
  • Calculate bid-ask spread and explain why the bid-ask spread for spot quotes may be different from the
    bid-ask spread for forward quotes.
  • Compare outright (forward) and swap transactions.
  • Define, compare and contrast transaction risk, translation risk and economic risk.
  • Describe examples of transaction, translation and economic risks and explain how to hedge these risks.
  • Describe the rationale for multi-currency hedging using options.
  • Identify and explain the factors that determine exchange rates.
  • Calculate and explain the effect of an appreciation/depreciation of a currency relative to a foreign currency.
  • Explain the purchasing power parity theorem and use this theorem to calculate the appreciation or depreciation of a foreign currency.
  • Describe the relationship between nominal and real interest rates.
  • Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem and use this theorem to calculate forward foreign exchange rates.
  • Distinguish between covered and uncovered interest rate parity conditions.

Chapter 10: Pricing Financial Forwards and Futures

(Previously: Determination of Forward and Future Prices)

  • ADDED: Distinguish between the forward price and the value of a forward contract.
  • ADDED: Calculate the value of a stock index futures contract and explain the concept of index arbitrage.
  • DELETED: Define income, storage costs, and convenience yield.
  • DELETED: Calculate the futures price on commodities incorporating income/storage costs and/or convenience yields.
  • DELETED: Describe the various delivery options available in the futures markets and how they can influence futures prices.
  • DELETED: Explain the relationship between current futures prices and expected future spot prices, including the impact of systematic and nonsystematic risk.
  • DELETED: Define and interpret contango and backwardation, and explain how they relate to the cost-of-carry model.

Chapter 11: Commodity Forwards and Futures

(Previously: Determination of Forward and Future Prices)

  • ADDED: Explain the key differences between commodities and financial assets.
  • ADDED: Describe the cost of carry model and illustrate the impact of storage costs and convenience yields on commodity forward prices and no-arbitrage bounds.
  • ADDED: Explain the relationship between current futures prices and expected future spot prices, including the impact of systematic and nonsystematic risk.
  • ADDED: Define and interpret normal backwardation and contango.
  • DELETED: Explain how basis risk can occur when hedging commodity price exposure.
  • DELETED: Evaluate the differences between a strip hedge and a stack hedge and explain how these differences impact risk management.
  • DELETED: Provide examples of cross-hedging, specifically the process of hedging jet fuel with crude oil and using weather derivatives.
  • DELETED: Compute a commodity spread.

Chapter 12: Options Markets

(Previously: Mechanics of Options Markets)

  • ADDED: Explain how dividends and stock splits can impact the terms of a stock option.
  • ADDED: Define and describe warrants, convertible bonds and employee stock options.

Chapter 13: Properties of Options

(Previously: Properties of Stock Options)

  • No Change

Chapter 14: Trading Strategies

(Previously: Trading Strategies involving Options)

  • ADDED: Describe principal protected notes (PPNs) and explain necessary conditions to create a PPN.

Chapter 15: Exotic Options

(Previously: Exotic Options)

  • No change

Chapter 16: Properties of Interest Rates

(Previously: Interest Rates)

  • No change

Chapter 17: Corporate Bonds

(Previously: Corporate Bonds)

  • ADDED: Describe features of bond trading and explain the behavior of bond yield.
  • ADDED: Evaluate the expected return from a bond investment and identify the components of the bond’s expected return.
  • DELETED: Explain a bond’s maturity date and how it impacts bond retirements.
  • DELETED: Describe zero-coupon bonds and explain the relationship between original-issue discount and reinvestment risk.
  • DELETED: Define and differentiate between an issuer default rate and a dollar default rate.

Chapter 18: Mortgages and Mortgage-Backed Securities

(Previously: Mortgages and Mortgage-Backed Securities)

  • ADDED: Describe the process of trading of pass-through agency MBS.
  • ADDED: Explain the mechanics of different types of agency MBS products, including collateralized mortgage obligations (CMOs), interest-only securities (IOs) and principal-only securities (POs).
  • DELETED: Calculate weighted average coupon, weighted average maturity, and conditional prepayment rate (CPR) for a mortgage pool.

Chapter 19: Interest Rate Futures

(Previously: Interest Rate Futures)

  • No Change

Chapter 20:  SWAPS

(Previously: SWAPS)

  • No Change

Book 4 – Valuation and Risk Models (Exam Weight: 30%)

Chapter 1: Measures of Financial Risk

(Previously: Measures of Financial Risk)

  • ADDED: Compare the normal distribution with the typical distribution of returns of risky financial assets such
    as equities.
  • DELETED: Describe how the results of scenario analysis can be interpreted as coherent risk measures.

Chapter 2: Calculating and Applying VaR

(Previously: Putting VaR to Work)

  • ADDED: Describe and explain the historical simulation approach for computing VaR and ES.

Chapter 3: Measuring and Monitoring Volatility

(Previously: Quantifying Volatility in VAR Models)

  • ADDED: Apply the exponentially weighted moving average (EWMA) approach and the GARCH (1,1) model to estimate volatility.
  • ADDED: Explain and apply approaches to estimate long horizon volatility/VaR and describe the process of mean reversion according to a GARCH (1,1) model.
  • ADDED: Describe an example of updating correlation estimates.
  • DELETED: Explain long horizon volatility/VaR and the process of mean reversion according to an AR(1) model.
  • DELETED: Explain the process of return aggregation in the context of volatility forecasting methods.

Chapter 4: External and Internal Credit Ratings

(Previously: External and Internal Ratings)

  • ADDED: Define and use the hazard rate to calculate unconditional default probability of a credit asset.
  • ADDED: Describe alternative methods to credit ratings produced by rating agencies.
  • DELETED: Describe the process for and issues with building, calibrating, and backtesting an internal rating system.
  • DELETED: Identify and describe the biases that may affect a rating system.

Chapter 5: Country Risk

(Previously: Country Risk: Determinants, Measures, and Implications)

  • ADDED: Describe characteristics of sovereign credit spreads and sovereign credit default swap (CDS) and compare the use of sovereign spreads to credit ratings.
  • DELETED: Describe the advantages and disadvantages of using the sovereign default spread as a predictor of defaults.

Chapter 6: Measuring Credit Risk

(Previously: Capital Structure in Banks)

  • ADDED: Estimate the mean and standard deviation of credit losses assuming a binomial distribution.
  • ADDED: Describe the Gaussian copula model and its application.
  • ADDED: Describe and apply the Vasicek model to estimate default rate and credit risk capital for a bank.
  • ADDED: Describe the CreditMetrics model and explain how it is applied in estimating economic capital.
  • ADDED: Describe and use the Euler’s theorem to determine the contribution of a loan to the overall risk of a portfolio.
  • ADDED: Explain why it is more difficult to calculate credit risk capital for derivatives than for loans.
  • DELETED: Calculate UL for a portfolio and the risk contribution of each asset.
  • DELETED: Describe how economic capital is derived.
  • DELETED: Explain how the credit loss distribution is modeled.
  • DELETED: Estimate the variance of default probability assuming a binomial distribution.

Chapter 7: Operational Risk

(Previously: Operational Risk)

  • ADDED: Describe the different categories of operational risk and explain how each type of risk can arise.
  • ADDED: Describe the standardized measurement approach and explain the reasons for its introduction by the Basel committee.
  • DELETED: Describe the Basel Committee’s seven categories of operational risk.

Chapter 8: Stress Testing

(Previously: Principles for Sound Stress Testing – Practices and Supervision, Governance over Stress Testing & Stress-Testing and other Risk Management Tools)

  • ADDED: Describe the Basel stress testing principles for banks regarding the implementation of stress testing.
  • CHANGE: Identify key aspects of stress testing governance, including choice of scenarios, regulatory specifications, model building, stress-testing coverage, capital and liquidity stress testing and reverse stress testing.
  • CHANGE: Explain the importance of stressed inputs and their importance in stressed VaR and stressed ES.
  • DELETED: Describe the various approaches to using VaR models in stress tests.

Chapter 9: Pricing Conventions, Discounting, and Arbitrage

(Previously: Prices, Discount Factors, and Arbitrage)

  • No change

Chapter 10: Interest Rates

(Previously: Spot, Forward, and Par Rates)

  • CHANGE: Describe a swap transaction and explain how a swap market defines par rates.
  • ADDED: Describe overnight indexed swap (OIS) and distinguish OIS rates from LIBOR swap rates.

Chapter 11: Bond Yields and Return Calculations

(Previously: Returns, Spreads, and Yields)

  • No change

Chapter 12: Applying Duration, Convexity, and DV01

(Previously: One-Factor Risk Metrics and Hedges)

  • ADDED: Describe an example of hedging based on effective duration and convexity.
  • DELETED: Explain the impact of negative convexity on the hedging of fixed income securities.

Chapter 13: Modeling and Hedging Non-Parallel Term Structure Shifts

(Previously: Multi-Factor Risk Metrics and Hedges)

  • ADDED: Describe the principal components analysis and explain its use in understanding term structure movements.
  • DELETED: Construct an appropriate hedge for a position across its entire range of forward-bucket exposures.

Chapter 14: Binomial Trees

(Previously: Binomial Trees)


Chapter 15: The Black-Scholes-Merton Model

(Previously: The Black-Scholes-Merton Model)

  • CHANGE: Describe warrants, calculate the value of a warrant and calculate the dilution cost of the warrant to existing shareholders.

Chapter 16: Option Sensitivity Measures: The “Greeks”

(Previously: The Greek Letters)

  • CHANGE: Define and calculate the delta of a portfolio.
  • CHANGE: Define and describe theta, gamma, vega and rho for option positions and calculate the gamma and vega for a portfolio.
  • DELETED: Describe how hedging activities take place in practice, and describe how scenario analysis can be used to formulate expected gains and losses with option positions.

FRM Part I & Part II Complete Course