###### Central Counterparties

Central counterparties, also known as CCPs, protect market participants from counterparty /credit/default risk... **Read More**

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

(Previously: Risk Management: A Helicopter View)

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

risk exposures.

(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)

(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.

*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.

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

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

(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.

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

- NO CHANGE

(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.

(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

(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.

- NO CHANGE

(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)

(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.

(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.

NEW CHAPTER

- 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.

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.

(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.

(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.

(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)

(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.

(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.

(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.

(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.

DELETED:

- 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.
- …

(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.

(Previously: Banks)

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

(Previously: Insurance Companies and Pension Plans)

- NO CHANGE

(Previously: Mutual Funds and Hedge Funds)

- NO CHANGE

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

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

(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.

(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

(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.

(Previously: Hedging Strategies using Futures)

- NO CHANGE

(New Reading)

ADDED:

- 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.

(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.

(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.

(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.

(Previously: Properties of Stock Options)

- No Change

(Previously: Trading Strategies involving Options)

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

(Previously: Exotic Options)

- No change

(Previously: Interest Rates)

- No change

(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.

(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.

(Previously: Interest Rate Futures)

- No Change

(Previously: SWAPS)

- No Change

(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.

(Previously: Putting VaR to Work)

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

(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.

(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.

(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.

(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.

(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.

(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.

(Previously: Prices, Discount Factors, and Arbitrage)

- No change

(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.

(Previously: Returns, Spreads, and Yields)

- No change

(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.

(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.

(Previously: Binomial Trees)

- NO CHANGE

(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.

(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

Nov 30, 2018
######
Central Counterparties

Central counterparties, also known as CCPs, protect market participants from counterparty /credit/default risk... **Read More**

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Jan 11, 2024
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