Anda di halaman 1dari 86

2009FRMExamination

AIMStatements

The FRM Study Guide sets forth primary topics and subtopics under the five riskrelated
disciplinescoveredintheFRMexam.ThetopicswereselectedbytheFRMCommitteeas
topics that risk managers who work in practice today have to master. The topics are
reviewedyearlytoensuretheFRMexamiskepttimelyandrelevant.

The Applying Instructional Materials Statements (AIMS) are designed to serve as an


additionalstudyresourceonlyandwillnotinandofthemselvesfullyprepareacandidate
for the FRM examination. They should be used as guidance and support for the readings
outlinedintheStudyGuidetohelpidentifykeylearningobjectivesforeachcorereading.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

2009byGlobalAssociationofRiskProfessionals,Inc.

Page1of86


AIMStatements,FRM2009

Page2of86

IMPORTANTNOTICE
2009FRMTransitionstoTwoLevelProgram

Inresponsetothechangesoccurringintheglobalmarketsandinrecognitionofthegrowingcomplexitiesassociatedwith
the profession of financial risk management, GARP has revised its FRM certification program. By implementing the
revisedprogramthisyear,GARPsFRMCommitteeandBoardofTrusteeshaverespondedtomarketdrivenrequirements
andoutwardlydemonstratedtheviewthatriskmanagementisadynamicdisciplinethatmustcontinuouslyencompass
productinnovationandevolvewithchangingmarketconditions.Theeventsofthepast24monthshaveledtoarapidly
growingandrecognizedneedforskilledriskmanagersworldwide.Toobjectivelyensuretheirskillsetsaresufficientto
meetboththechallengesandopportunitiesofanincreasinglyglobalandinterconnectedfinancialenvironment,theFRM
programssyllabuswasrevisedtomoreadequatelymeasureacandidatesunderstandingofthetoolsnecessarytoassess
financial risks, and the candidates ability to apply those tools in a practicetype setting. This FRM program change is
designed to ensure that the FRM designation continues to evolve and represent the high standards for which it is
recognizedworldwide.

This year the FRM program will transition to a twolevel examination format by offeringfor the last time the full FRM
exam, and for the first time, Level I of the new twolevel FRM exam program. Level I covers core areas of risk
management such as quantitative analysis, financial markets and products, and essential riskmodeling. Level II covers
specifictopicsonthepracticalimplementationandexecutionofapproachestomeasuringandmanagingmarket,credit,
operationalandfirmwiderisks,andalsoincludesanewsectioncoveringcurrentissuesinfinancialmarkets.

Commencingin2010,bothLevelsIandIIwillbeofferedtocandidateseveryMayandNovember.TheFRMCommittee
willcontinuetopublishannuallytheFRMStudyGuidewhichwilldefinethetopics,readings,andtestweightsforboththe
LevelIandIIprogramsforthatyear.

Inthistransitionyear,theFRMincludestwooptionsforNovember2009.CandidatescanchoosetotakethelastfullFRM
exam (candidates who successfully pass this exam and have proper work experience will be awarded the FRM
designation)ortheinauguralLevelIexam(candidateswhosuccessfullypassthisexamwillbeeligibletositfortheLevelII
exam in the future). The 2009 FRM Study Guide has been designed for the transition to a twolevel program and lists
topics,readings,andtestweightsforthetwolevelprogram.

CandidatesoptingtotakethelastfullFRMexamwillbetestedonalltopicsandreadingslistedinthisStudyGuidefrom
bothLevelsIandII.Thefull2009FRMexamwillbea5hour(22.5hoursessions),140multiplechoicequestionexam.
FromLevelsIandIItopicslistedinthisStudyGuide,testweightsandquestionallocationforthefull2009FRMexamwill
beasfollows:

FoundationsofRiskManagement

10%
14questions

QuantitativeAnalysis

10%
14questions

FinancialMarketsandProducts

15%
21questions

ValuationandRiskModels

15%
21questions

MarketRiskMeasurementandManagement
10%
14questions

CreditRiskMeasurementandManagement

10%
14questions

OperationalandIntegratedRiskManagement
10%
14questions

RiskManagementandInvestmentManagement
10%
14questions

CurrentIssuesinFinancialMarkets

10%
14questions

CandidatesoptingtotaketheinauguralLevelIFRMexamwillbetestedontheLevelItopicsandreadingslistedinthis
StudyGuide.The2009LevelIFRMexamwillbea4hour(22hoursessions),100multiplechoicequestionexam.From
theLevelItopicslistedinthisStudyGuide,testweightsandquestionallocationforthe2009LevelIFRMexamwillbeas
follows:

FoundationsofRiskManagement

20%
20questions

QuantitativeAnalysis

20%
20questions

FinancialMarketsandProducts

30%
30questions

ValuationandRiskModels

30%
30questions

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page3of86

2009FRMCommitteemembers

Dr.RenStulz(Chairman)
RichardApostolik

JuanCarlosGarciaCespedes
Dr.ChristopherDonohue
HervGeny

Dr.SatyajitKarnik

KaiLeifert

SteveLerit,CFA

MichelleMcCarthy

MichaelB.Miller

EzraUziMoualem

Dr.VictorNg

Dr.ElliotNoma

RobertScanlon

SergeSverdlov

AlanWeindorf

OhioStateUniversity
GlobalAssociationofRiskProfessionals
BancoBilbaoVizcayaArgentaria
GlobalAssociationofRiskProfessionals
ICAP
GlobalAssociationofRiskProfessionals
NorthernTrustGlobalInvestments
NewYorkLifeInvestmentManagement
RussellInvestments
TremblantCapitalGroup
TheFinancialInstituteofIsrael&ZRisk
Goldman,Sachs&Co
GarrettAssetManagement
StandardCharteredBank
MicrosoftCorporation
Visa

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page4of86

2009FRMExamination
AIMSStatements

TableofContents

FoundationsofRiskManagement(LevelITopic)...............................................................5
QuantitativeAnalysis(LevelITopic).................................................................................10
FinancialMarketsandProducts(LevelITopic).................................................................17
ValuationandRiskModels(LevelITopic)........................................................................29
MarketRiskMeasurementandManagement....................................................................41
CreditRiskMeasurementandManagement.....................................................................49
OperationalandIntegratedRiskManagement.................................................................61
RiskManagementandInvestmentManagement..............................................................73
CurrentIssuesinFinancialMarkets...................................................................................81

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page5of86

FoundationsofRiskManagement(LevelITopic)
LevelIExamWeight:20%,FullExamWeight:10%

Creatingvaluewithriskmanagement
Marketefficiency,equilibriumandtheCapitalAssetPricingModel(CAPM)
Performancemeasurementandattribution
Sharperatioandinformationratio
Trackingerror
FactormodelsandArbitragePricingTheory
Riskmanagementfailures
Casestudies
Ethics

ReadingsforFoundationsofRiskManagement

1. PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rd
Edition(NewYork:McGrawHill,2007).
Chapter1TheNeedforRiskManagement

2. NoelAmencandVeroniqueLeSourd,PortfolioTheoryandPerformanceAnalysis(West
Sussex,England:Wiley,2003).
Chapter4TheCapitalAssetPricingModelandItsApplicationtoPerformance
Measurement

3. RichardGrinoldandRonaldKahn,ActivePortfolioManagement:AQuantitative
ApproachforProducingSuperiorReturnsandControllingRisk,2ndEdition(NewYork:
McGrawHill,1999).
Chapter7ExpectedReturnsandtheArbitragePricingTheory

4. RenStulz,RiskManagement&Derivatives(Florence,KY:ThomsonSouthWestern,
2002).
Chapter2InvestorsandRiskManagement
Chapter3CreatingValuewithRiskManagement

5. RenStulz,RiskManagementFailures:WhatareTheyandWhenDoTheyHappen?
FisherCollegeofBusinessWorkingPaperSeries(Oct.2008).

6. RetoGallati,RiskManagementandCapitalAdequacy(NewYork:McGrawHill,2003).
Chapter6CaseStudies

7. GARPCodeofConduct.Availableat:www.garp.com/about/GARPCodeofConduct.aspx.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page6of86

ReadingsforFoundationsofRiskManagementAIMS

PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rdEdition
(NewYork:McGrawHill,2007).
Chapter1TheNeedforRiskManagement

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineriskanddescribesomeofthemajorsourcesofrisk
Differentiatebetweenbusinessandfinancialrisksandgiveexamplesofeach
Relatesignificantmarketeventsofthepastseveraldecadestothegrowthoftherisk
managementindustry
Describethefunctionsandpurposesoffinancialinstitutionsastheyrelatetofinancialrisk
management
Definewhataderivativecontractisandhowitdiffersfromasecurity
Describethedualroleleverageplaysinderivativesandwhyitisrelevanttoariskmanager
Definefinancialriskmanagement
Definevalueatrisk(VaR)anddescribehowitisusedinriskmanagement
DescribetheadvantagesanddisadvantagesofVaRrelativetootherriskmanagementtools
suchasstoplosslimits,notionallimits,andexposurelimits
Compareandcontrastvaluationandriskmanagement,usingVaRasanexample
Defineanddescribethefourmajortypesoffinancialrisks:market,liquidity,credit,and
operational
Withinmarketrisk:
o Describeanddifferentiatebetweenabsoluteandrelativemarketrisk
o Describeanddifferentiatebetweendirectionalandnondirectionalmarketrisk
o Describebasisriskanditssources
o Describevolatilityriskanditssources
Withinliquidityrisk:
o Describeanddifferentiatebetweenassetandfundingliquidityrisk
Withincreditrisk:
o Describeanddifferentiatebetweenexposureandrecoveryrate
o Describecrediteventandhowitmayrelatetomarketrisk
o Describesovereignriskanditssources
o Describesettlementriskanditssources
Withinoperationalrisk:
o Describethepotentialrelationshipsbetweenoperational,marketandcreditrisk
o Describemodelriskanditssources
o Describepeoplerisk
o Describelegalriskanditssources

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page7of86

NoelAmencandVeroniqueLeSourd,PortfolioTheoryandPerformanceAnalysis(WestSussex,
England:Wiley,2003).
Chapter4TheCapitalAssetPricingModelandItsApplicationtoPerformance
Measurement

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethecapitalmarketlineandtheconstructionoftheefficientfrontierbothwithand
withoutariskfreeasset.
Describehowthecovariance/correlationofreturnsbetweensecuritiesaffectsthereturns
distributionofaportfolioofsecurities.
DescribetheCapitalAssetPricingModel(CAPM),listitsunderlyingassumptions,and
explainitsimplications,contributionsandlimitations.
Defineandcalculatethepriceofriskandthequantityofrisk(beta).
Definemarketefficiency,identifythethreeformsofmarketefficiency,anddiscussthelink
betweenefficiencyandtheCAPM.
Calculate,compare,andevaluatetheTreynormeasure,theSharpemeasure,andJensen's
alpha.
Computeandinterprettrackingerror,theinformationratio,andtheSortinoratio.

RichardGrinoldandRonaldKahn,ActivePortfolioManagement:AQuantitativeApproachfor
ProducingSuperiorReturnsandControllingRisk,2ndEdition(NewYork:McGrawHill,1999).
Chapter7ExpectedReturnsandtheArbitragePricingTheory

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribelimitationsanddeficienciesintheCAPM.
DefineanddescribethecomponentsoftheArbitragePricingTheory(APT)model.
CalculateasecuritysexpectedexcessreturnsusingtheAPTmodelandinterpretthe
results.
DiscusstherelationshipbetweenAPTandtheCAPM.
DescribethepropertiesofaqualifiedmodelinthecontextoftheAPT.
Describethedifficultiesinvolvedwithfactorforecasting.
Describesomeofthemethodstypicallyusedinfactorforecasting.
DescribeandcomparetheattributesofpurelystatisticalandstructuralAPTmodels.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page8of86

RenStulz,RiskManagement&Derivatives(Florence,KY:ThomsonSouthWestern,2002).
Chapter2InvestorsandRiskManagement

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainhowexpectedreturnandreturnsvarianceareusedtodescribethereturn
distributionforasecurityorportfolioofsecurities.
Defineanddescribethesignificantcharacteristicsoftheefficientfrontier.
Differentiatebetweendiversifiableandsystematicriskanddescribehowdiversificationcan
reduceriskinaportfolio.
DescribetheCAPM,andexplaintheconceptsofbetaandthesecuritymarketline.
CalculateandinterpretfirmvalueusingtheCAPM.
UsetheCAPMtodiscussthevalueofriskmanagementtoinvestorswithrespectto:
o Afirmsdiversifiablerisk.
o Afirmssystemicrisk.
Defineanddiscussthehedgingirrelevancepropositionasitrelatesto:
o Diversifiablerisk
o Systematicrisk
o RisksvaluedbyinvestorsdifferentlyfromwhatCAPMwouldpredict.

RenStulz,RiskManagement&Derivatives(Florence,KY:ThomsonSouthWestern,2002).
Chapter3CreatingValuewithRiskManagement

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainhowriskmanagementcancreatevaluebyhandlingbankruptcycosts.
Explainhowriskmanagementcancreatevaluemovingincomeacrosstimeandreducing
taxes.
Describethosecircumstanceswhenriskreductionbenefitingalargeshareholdermay
increaseordecreasefirmvalue.
Explaintherelationshipbetweenriskmanagement,managerialincentives,andthe
structureofmanagementcompensation.
Describedebtoverhang,andexplainhowriskmanagementcanincreasefirmvalueby
reducingtheprobabilityofdebtoverhang.
Explainhowriskmanagementcanreducetheproblemofinformationasymmetryand
increasefirmvalue.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page9of86

RenStulz,RiskManagementFailures:WhatareTheyandWhenDoTheyHappen?Fisher
CollegeofBusinessWorkingPaperSeries(Oct.2008).

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definetheroleofriskmanagementandexplainwhyalargefinanciallossisnotnecessarily
afailureofriskmanagement.
Describehowriskmanagementcanfail
Describehowriskcanbemismeasured.
Explainhowafirmcanfailtotakeknownandunknownrisksintoaccountinmaking
strategicdecisions.
Explaintheimportanceofcommunicationineffectiveriskmanagement.
Describehowfirmscanfailtocorrectlymonitorandmanageriskonanongoingbasis
Explaintheroleofriskmetricsanddiscusstheshortcomingsofexistingriskmetrics.

RetoGallati,RiskManagementandCapitalAdequacy(NewYork:McGrawHill,2003).
Chapter6CaseStudies

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribethefactorsthatledtothefinancialcrisisatMetallgesellschaft.
o Explainastackandrollhedgingstrategy,andidentifywhyusingsuchastrategy
wasineffectiveforMetallgesellschaft.
DescribethefactorsthatledtohugelossesatSumitomo.
DescribethefactorsthatledtothedownfallofLongTermCapitalManagement(LTCM).
DescribethefactorsthatledtothebankruptcyofBarings.
Explainthecontributionofmarket,creditandoperationalrisktypestothefinanciallosses
inalltheabovecases.

GARPCodeofConduct.Availableat:www.garp.com/about/GARPCodeofConduct.aspx.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribetheresponsibilityofeachGARPmemberwithrespecttoprofessionalintegrity,
ethicalconduct,conflictsofinterest,confidentialityofinformationandadherenceto
generallyacceptedpracticesinriskmanagement.
DescribethepotentialconsequencesofviolatingtheGARPCodeofConduct.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page10of86

QuantitativeAnalysis(LevelITopic)
LevelIExamWeight:20%,FullExamWeight:10%

Mean,standarddeviation,correlation,skewness,andkurtosis
Probabilitydistributions
Estimatingparametersofdistributions
Linearregressionandcorrelation,hypothesistesting
Statisticalinference
Estimatingcorrelationandvolatility
EWMA,GARCHmodels
Maximumlikelihoodmethods
Volatilitytermstructures
Simulationmethods

ReadingsforQuantitativeAnalysis

8. DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,
2006).
Chapter1TheNatureandScopeofEconometrics
Chapter2ReviewofStatistics:ProbabilityandProbabilityDistributions
Chapter3CharacteristicsofProbabilityDistributions
Chapter4SomeImportantProbabilityDistributions
Chapter5StatisticalInference:EstimationandHypothesisTesting
Chapter6BasicIdeasofLinearRegression:TheTwoVariableModel
Chapter7TheTwoVariableModel:HypothesisTesting
Chapter8MultipleRegression:EstimationandHypothesisTesting

9. Jorion,ValueatRisk,3rdEdition
Chapter12MonteCarloMethods

10. JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,
2009).
Chapter21EstimatingVolatilitiesandCorrelations

11. SvetlozarRachev,ChristianMenn,andFrankFabozzi,FatTailedandSkewedAsset
ReturnDistributions:ImplicationsforRiskManagement,PortfolioSelectionandOption
Pricing(Hoboken,NJ:Wiley,2005).
Chapter2DiscreteProbabilityDistributions
Chapter3ContinuousProbabilityDistributions

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page11of86

ReadingsforQuantitativeAnalysisAIMS

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter1TheNatureandScopeofEconometrics

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethemethodologyofeconometrics.
Distinguishbetweenthedifferenttypesofdatausedforempiricalanalysis.
Describetheprocessofspecifying,interpreting,andvaliditytestinganeconometricmodel.

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter2ReviewofStatistics:ProbabilityandProbabilityDistributions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definerandomvariables,anddistinguishbetweencontinuousanddiscreterandom
variables.
Definetheprobabilityofanevent.
Describetherelativefrequencyorempiricaldefinitionofprobability.
DefineBayestheoremandapplyBayes'formulatodeterminetheprobabilityofanevent.
Describeandinterprettheprobabilitymassfunction,probabilitydensityfunction,and
cumulativedensityfunctionforarandomvariable.
Distinguishbetweenunivariateandmultivariateprobabilitydensityfunctions.
Describemarginalandconditionalprobabilityfunctions.
Explainthedifferencebetweenstatisticalindependenceandstatisticaldependence.

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter3CharacteristicsofProbabilityDistributions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Define,calculateandinterprettheexpectedvalueofarandomvariable.
Define,calculateandinterpretthevarianceofarandomvariable.
DefineandapplyChebyshevsinequalitytodeterminetheprobabilitythatarandom
variableliesinacertainrange.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page12of86

Define,calculateandinterpretthecovarianceandcorrelationoftworandomvariables.
Define,calculateandinterpretthemeanandvarianceofasetofrandomvariables.
Describethedifferencebetweenconditionalandunconditionalexpectation.
Define,calculateandinterprettheskewnessandkurtosisofarandomvariable.
Describeandidentifyaplatykurticandleptokurticdistribution.
Definetheskewnessandkurtosisofanormallydistributedrandomvariable.
Distinguishbetweenpopulationandsample,andcalculatethesamplemean,variance,
covariance,correlation,skewness,andkurtosis.

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter4SomeImportantProbabilityDistributions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethekeypropertiesofthenormaldistributionandthestandardnormaldistribution.
Discusstheconceptofrandomsamplingandthesamplingdistributionofanestimator.
Constructafrequencydistributionandcalculaterelativefrequenciesfromafrequency
distribution.
Defineandcalculatethestandarderrorofasamplemean.
Describethecentrallimittheorem.
Describethekeypropertiesofthetdistribution,chisquaredistribution,andFdistribution,
andidentifycommonoccurrencesofeachdistribution.

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter5StatisticalInference:EstimationandHypothesisTesting

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetheconceptofstatisticalinference,includingestimationandhypothesistesting.
Defineanddistinguishanestimatorandaparameter.
Defineanddistinguishbetweenpointestimateandintervalestimation.
Defineandinterpretcriticaltvalues.
Define,calculateandinterpretaconfidenceinterval.
Describethepropertiesofpointestimators.
o Distinguishbetweenunbiasedandbiasedestimators.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page13of86

o Defineanefficientestimatorandconsistentestimator.
Explainandapplytheprocessofhypothesistesting.
o Defineandinterpretthenullhypothesisandthealternativehypothesis.
o Distinguishbetweenonesidedandtwosidedhypotheses.
o Describetheconfidenceintervalapproachtohypothesistesting.
o Describethetestofsignificanceapproachtohypothesistesting.
o Define,calculateandinterprettypeIandtypeIIerrors.
o Defineandinterpretthepvalue.
DescribeandinterpretthechisquaredtestofsignificanceandtheFtestofsignificance.

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter6BasicIdeasofLinearRegression:TheTwoVariableModel

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainhowregressionanalysisineconometricsmeasurestherelationshipbetween
dependentandindependentvariables.
Defineandinterprettheresultsofascattergram.
Defineandinterpretapopulationregressionfunction,regressioncoefficients,parameters,
slopeandtheintercept.
Defineandinterpretthestochasticerrorterm(ornoisecomponent).
Defineandinterpretasampleregressionfunction,regressioncoefficients,parameters,
slopeandtheintercept.
Describethekeypropertiesofalinearregression.
Distinguishbetweentwovariableandmultivariableregression.
Describethemethodofordinaryleastsquaresforestimationofparameters.
o Defineandinterprettheresidualsumofsquares.
o Interprettheresultsofanordinaryleastsquaresregression.

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter7TheTwoVariableModel:HypothesisTesting

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explaintheassumptionsoftheclassicallinearregressionmodel.
Defineanddistinguishhomoscedasticityandheteroscedasticity.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page14of86

Define,calculateandinterpretthestandarderrorsinanOLSmodel.
Defineandinterprettheresidualsumofsquaresandthestandarderrorofaregression.
DescribehypothesistestinginanOLSregressionmodel.
Define,calculateandinterpretthecoefficientofdeterminationandthecoefficientof
correlation.
Describeandinterpretnormalitytestingusinghistogramsandnormalprobabilityplots.
DescribeandinterprettheJarqueBeratestofnormality.
Describeforecasting,orprediction,error.

DamodarGujarati,EssentialsofEconometrics,3rdEdition(NewYork:McGrawHill,2006).
Chapter8MultipleRegression:EstimationandHypothesisTesting

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Distinguishbetweensimpleandmultivariateregression.
Defineandinterpretthepartialslopecoefficient.
Explaintheassumptionsofthemultiplelinearregressionmodel.
Explaintheconceptofmulticollinearityandtheimplicationsithasonmodeling.
Describetheprocessofestimatingparametersofmultipleregression.
Defineandinterpretthevarianceandstandarderrorsinamultilinearregression.

PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rdEdition
(NewYork:McGrawHill,2007).
Chapter12MonteCarloMethods

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribehowtosimulateapricepathusingageometricBrownianmotionmodel.
Describehowtosimulatevariousdistributionsusingtheinversetransformmethod.
Describethebootstrapmethod.
ExplainhowsimulationscanbeusedforcomputingVaRandpricingoptions.
DescribetherelationshipbetweenthenumberofMonteCarloreplicationsandthe
standarderroroftheestimatedvalues.
Describeandidentifysimulationaccelerationtechniques.
ExplainhowtosimulatecorrelatedrandomvariablesusingCholeskyfactorization.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page15of86

Describedeterministicsimulations.
Discussthedrawbacksandlimitationsofsimulationprocedures.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter21EstimatingVolatilitiesandCorrelations

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Discusshowhistoricaldataandvariousweightingschemescanbeusedinestimating
volatility.
Describetheexponentiallyweightedmovingaverage(EWMA)modelforestimating
volatilityanditsproperties.
o EstimatevolatilityusingtheEWMAmodel.
Describethegeneralizedautoregressiveconditionalheteroscedasticity(GARCH(p,q))
modelforestimatingvolatilityanditsproperties.
o EstimatevolatilityusingtheGARCH(p,q)model.
o ExplainmeanreversionandhowitiscapturedintheGARCH(1,1)model.
DiscusshowtheparametersoftheGARCH(1,1)andtheEWMAmodelsareestimatedusing
maximumlikelihoodmethods.
ExplainhowGARCHmodelsperforminvolatilityforecasting.
Discusshowcorrelationsandcovariancesarecalculated,andexplaintheconsistency
conditionforcovariances.

SvetlozarRachev,ChristianMenn,andFrankFabozzi,FatTailedandSkewedAssetReturn
Distributions:ImplicationsforRiskManagement,PortfolioSelectionandOptionPricing
(Hoboken,NJ:Wiley,2005).
Chapter2DiscreteProbabilityDistributions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribethekeypropertiesoftheBernoullidistribution,Binomialdistribution,andPoisson
distribution,andidentifycommonoccurrencesofeachdistribution.
IdentifythedistributionfunctionsofBinomialandPoissondistributionsforvarious
parametervalues.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page16of86

SvetlozarRachev,ChristianMenn,andFrankFabozzi,FatTailedandSkewedAssetReturn
Distributions:ImplicationsforRiskManagement,PortfolioSelectionandOptionPricing
(Hoboken,NJ:Wiley,2005).
Chapter3ContinuousProbabilityDistributions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribethekeypropertiesofNormal,Exponential,Weibull,Gamma,Beta,Chisquared,
Studentst,Lognormal,LogisticandExtremeValuedistributions.
Explainthesummationstabilityofnormaldistributions.
Describethehazardrateofanexponentiallydistributedrandomvariable.
ExplaintherelationshipbetweenexponentialandPoissondistributions.
ExplainwhythegeneralizedParetodistributioniscommonlyusedtomodeloperationalrisk
events.
Explaintheconceptofmixturesofdistributions.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page17of86

FinancialMarketsandProducts(LevelITopic)
LevelIExamWeight:30%,FullExamWeight:15%

Clearinghousemechanisms,structuralhubs,exchanges
Netting,collateralanddowngradetriggers
Futures,forwards,swaps,andoptions
Derivativesonfixedincomesecurities,interestrates,foreignexchange,equities,and
commodities
Measuringportfolioexposures
Americanoptions,effectsofdividends,earlyexercise
Tradingstrategieswithderivatives
Minimumvariancehedgeratio
Cheapesttodeliverbond,conversionfactors
Commodityderivatives,costofcarry,leaserate,convenienceyield
Basisrisk
Foreignexchangerisk
Corporatebonds
Debtequityswaps,loansales,Bradybonds

ReadingsforFinancialMarketsandProducts

12. JohnCaouette,EdwardAltman,PaulNarayananandRobertNimmo,ManagingCredit
Risk:TheGreatChallengefortheGlobalFinancialMarkets,2ndEdition(Hoboken,NJ:
Wiley2008).
Chapter5StructuralHubs:Clearinghouses,DerivativeProductCompanies,and
Exchanges

13. Hull,Options,Futures,andOtherDerivatives,7thEdition.
Chapter1Introduction
Chapter2MechanicsofFuturesMarkets
Chapter3HedgingStrategiesUsingFutures
Chapter4InterestRates
Chapter5DeterminationofForwardandFuturesPrices
Chapter6InterestRateFutures
Chapter7Swaps
Chapter9PropertiesofStockOptions
Chapter10TradingStrategiesInvolvingOptions

14. RobertMcDonald,DerivativesMarkets(Boston:AddisonWesley,2003).
Chapter6CommodityForwardsandFutures

15. HelyetteGeman,CommoditiesandCommodityDerivatives:ModelingandPricingfor
Agriculturals,MetalsandEnergy(WestSussex,England:Wiley,2005)

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page18of86

Chapter1FundamentalsofCommoditySpotandFuturesMarkets:Instruments,
ExchangesandStrategies

16. AnthonySaundersandMarciaMillonCornett,FinancialInstitutionsManagement:A
RiskManagementApproach,6thEdition(NewYork:McGrawHill,2008).
Chapter14ForeignExchangeRisk
Appendix15AMechanismsforDealingwithSovereignRiskExposure

17. FrankFabozzi,TheHandbookofFixedIncomeSecurities,7thedition(NewYork:Mcgraw
Hill,2005)
Chapter13CorporateBonds

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page19of86

ReadingsforFinancialMarketsandProductsAIMS

JohnCaouette,EdwardAltman,PaulNarayananandRobertNimmo,ManagingCreditRisk:
TheGreatChallengefortheGlobalFinancialMarkets,2ndEdition(Hoboken,NJ:Wiley2008).
Chapter5StructuralHubs:Clearinghouses,DerivativeProductCompanies,and
Exchanges

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethemajorplayersinthederivativesmarket,including:
o Derivativesdealers
o Clearinghouses
o Exchanges
Describemechanismsbywhichanexchangeorclearinghousecanreducecounterpartyrisk,
including:
o Participantstandards
o Contractstandardization
o Marginrequirements
o Netting
o Collateralrequirements
o Downgradetriggers
o Markingtomarket
o Surveillance
Explaintherelationship(s)betweenexchangesandclearinghouses.
Distinguishprivateexchangesfrompublicexchanges.
Describesomeofthelimitationsofstructuralhubs.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter1Introduction

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Differentiatebetweenanopenoutcrysystemandelectronictrading.
Describetheoverthecountermarketandhowitdiffersfromtradingonanexchange,
includingadvantagesanddisadvantages.
Differentiatebetweenoptions,forwards,andfuturescontracts.
Calculateandidentifyoptionandforwardcontractpayoffs.
Describe,contrast,andcalculatethepayoffsfromhedgingstrategiesinvolvingforward
contractsandoptions.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page20of86

Describe,contrast,andcalculatethepayoffsfromspeculativestrategiesinvolvingfutures
andoptions.
Calculateanarbitragepayoffanddescribehowarbitrageopportunitiesareephemeral.
Describesomeoftherisksthatcanarisefromthe(mis)useofderivatives.
Define:
o Derivative
o Marketmaker
o Spotcontract,Forwardcontract,andFuturescontract
o CalloptionandPutoption
o AmericanoptionandEuropeanoption
o Longpositionandshortposition
o Exercise(strike)price
o Expiration(maturity)date
o Bidpriceandofferprice
o Bidofferspread
o Hedgersandspeculators
o Arbitrageurs

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter2MechanicsofFuturesMarkets

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineanddescribethekeyfeaturesofafuturescontract.
Compareandcontrastforwardandfuturescontracts.
Explaintheconvergenceoffuturesandspotprices.
Describetherationaleformarginrequirementsandexplainhowtheywork.
Describetheroleofaclearinghouseinfuturestransactions.
Describetheroleofcollateralizationintheoverthecountermarketandcompareittothe
marginingsystem.
Identifyanddescribethedifferencesbetweenanormalandinvertedfuturesmarket.
Describethemechanicsofthedeliveryprocessandcontrastitwithcashsettlement.
Defineanddemonstrateanunderstandingoftheimpactofdifferentordertypes,including:
market,limit,stoploss,stoplimit,marketiftouched,discretionary,timeofday,open,
andfillorkill
Define:
o Noticeofintentiontodeliver
o Limitupandlimitdown
o Marginaccount

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

o
o
o
o

Page21of86

Initialmargin,maintenancemargin,variationmarginandclearingmargin
Collateralization
Settlementprice
Openinterest

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter3HedgingStrategiesUsingFutures

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineanddifferentiatebetweenshortandlonghedgesandidentifysituationswherethey
areappropriate.
Describetheargumentsforandagainsthedgingandthepotentialimpactofhedgingon
firmprofitability.
Defineandcomputethebasis.
Definethevarioussourcesofbasisriskandexplainhowbasisrisksarisewhenhedgingwith
futures.
Definecrosshedging.
Define,computeandinterprettheminimumvariancehedgeratioandhedgeeffectiveness.
Define,computeandinterprettheoptimalnumberoffuturescontractsneededtohedgean
exposure,includingatailingthehedgeadjustment.
Demonstratehowstockindexfuturescontractscanbeusedtochangeastockportfolios
beta.
Describewhatismeantbyrollingthehedgeforwardanddiscusssomeoftherisksthat
arisefromsuchastrategy.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter4InterestRates

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Calculatethevalueofaninvestmentusingdaily,weekly,monthly,quarterly,semiannual,
annual,andcontinuouscompounding.Convertratesbasedondifferentcompounding
frequencies.
Calculatethetheoreticalpriceofacouponpayingbondusingspotrates.
Calculateforwardinterestratesfromasetofspotrates.
Valueandcalculatethecashflowsfromaforwardrateagreement(FRA).

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page22of86

Describethelimitationsofdurationandhowconvexityaddressessomeofthem.
Calculatethechangeinabondspricegivenduration,convexity,andachangeininterest
rates.
Defineanddiscussthemajortheoriesofthetermstructureofinterestrates.
Define:
o Spotrate
o Paryield
o Bootstrapmethod
o Forwardrateagreement
o Basispoint
o Duration
o Modifiedduration
o Dollarduration
o Convexity

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter5DeterminationofForwardandFuturesPrices

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Differentiatebetweeninvestmentandconsumptionassets.
Defineshortsellingandshortsqueeze.
Discussthedifferencesbetweenforwardandfuturescontractsandexplaintherelationship
betweenforwardandspotprices.
Calculatetheforwardprice,giventheunderlyingassetsprice,withorwithoutshortsales
and/orconsiderationtotheincomeoryieldoftheunderlyingasset.Describeanarbitrage
argumentinsupportoftheseprices.
Explaintherelationshipbetweenforwardandfuturesprices.
Usetheinterestrateparityrelationshiptocalculateaforwardforeignexchangerate.
Defineincome,storagecosts,andconvenienceyield.
Calculatethefuturespriceoncommoditiesincorporatingstoragecostsand/orconvenience
yields.
Defineandcalculate,usingthecostofcarrymodel,forwardpriceswheretheunderlying
asseteitherdoesordoesnothaveinterimcashflows.
Discussthevariousdeliveryoptionsavailableinthefuturesmarketsandhowtheycan
influencefuturesprices.
Analyzetherelationshipbetweencurrentfuturespricesandexpectedfuturespotprices,
includingtheimpactofsystematicandnonsystematicrisk.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page23of86

Definecontangoandbackwardation,interprettheeffectcontangoorbackwardationmay
haveontherelationshipbetweencommodityfuturesandspotprices,andrelatethecost
ofcarrymodeltocontangoandbackwardation.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter6InterestRateFutures

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Listthemostcommonlyuseddaycountconventions,identifythemarketsthateachoneis
typicallyusedin,andapplyeachtoaninterestcalculation.
ConvertfromadiscountratetoapriceforaUSTreasurybill.
DifferentiatebetweenthecleananddirtypriceforaUSTreasurybond;calculatethe
accruedinterestanddirtypriceonaUSTreasurybond.
ExplainandcalculateaUSTreasurybondfuturescontractconversionfactor.
CalculatethecostofdeliveringabondintoaTreasurybondfuturescontract.
Describetheimpactofthelevelandshapeoftheyieldcurveonthecheapesttodeliver
bonddecision.
CalculatethetheoreticalfuturespriceforaTreasurybondfuturescontract.
CalculatethefinalcontractpriceonaEurodollarfuturescontract.
DescribeandcomputetheEurodollarfuturescontractconvexityadjustment.
DemonstratehowEurodollarfuturescanbeusedtoextendtheLIBORzerocurve.
Calculatethedurationbasedhedgeratioanddescribeadurationbasedhedgingstrategy
usinginterestratefutures.
Explainthelimitationsofusingadurationbasedhedgingstrategy.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter7Swaps

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthemechanicsofaplainvanillainterestrateswapandcomputeitscashflows.
Explainhowaplainvanillainterestrateswapcanbeusedtotransformanassetoraliability
andcalculatetheresultingcashflows.
Explaintheroleoffinancialintermediariesintheswapsmarket.
Describetheroleoftheconfirmationinaswaptransaction.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page24of86

Describethecomparativeadvantageargumentfortheexistenceofinterestrateswapsand
discusssomeofthecriticismsofthisargument.
Explainhowthediscountratesinaplainvanillainterestrateswaparecomputed.
Valueaplainvanillainterestrateswapbasedontwosimultaneousbondpositions.
Valueaplainvanillainterestrateswapfromasequenceofforwardrateagreements(FRAs).
Explainthemechanicsofacurrencyswapandcomputeitscashflows.
Describethecomparativeadvantageargumentfortheexistenceofcurrencyswaps.
Explainhowacurrencyswapcanbeusedtotransformanassetorliabilityandcalculatethe
resultingcashflows.
Valueacurrencyswapbasedontwosimultaneousbondpositions.
ValueacurrencyswapbasedonasequenceofFRAs.
Discusstheroleofcreditriskinherentinanexistingswapposition.
Listanddefineothertypesofswaps,includingcommodity,volatilityandexoticswaps.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter9PropertiesofStockOptions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Identifythesixfactorsthataffectanoption'spriceanddiscusshowthesesixfactorsaffect
thepriceforbothEuropeanandAmericanoptions.
Identify,interpretandcomputeupperandlowerboundsforoptionprices.
Explainputcallparityandcalculate,usingtheputcallparityonanondividendpaying
stock,thevalueofaEuropeanandAmericanoption,respectively.
ExplaintheearlyexercisefeaturesofAmericancallandputoptionsonanondividend
payingstockandthepriceeffectearlyexercisemayhave.
Discusstheeffectsdividendshaveontheputcallparity,theboundsofputandcalloption
prices,andontheearlyexercisefeatureofAmericanoptions.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter10TradingStrategiesInvolvingOptions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthemotivationtoinitiateacoveredcalloraprotectiveputstrategy.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page25of86

Describeandexplaintheuseandpayofffunctionsofspreadstrategies,includingbull
spread,bearspread,calendarspread,butterflyspread,anddiagonalspread.
Calculatethepayoffsofvariousspreadstrategies.
Describeandexplaintheuseandpayofffunctionsofcombinationstrategies,including
straddles,strangles,strips,orstraps.
Computethepayoffsofcombinationstrategies.

RobertMcDonald,DerivativesMarkets(Boston:AddisonWesley,2003).
Chapter6CommodityForwardsandFutures

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineforwardstripandforwardcurve.
Describehowtocreateasyntheticcommoditypositionanduseittoexplainthe
relationshipbetweentheforwardpriceandtheexpectedfuturespotprice.
Explaintheeffectnonstorabilityhasonelectricityprices.
Derivethebasicequilibriumformulaforpricingcommodityforwardsandfutures.
Explaintheimplicationbasicequilibriumhasfordifferenttypesofcommodities.
Describeanarbitragetransactionincommodityforwardsandfutures,andcomputethe
potentialarbitrageprofit.
Definetheleaserateandhowitdeterminesthenoarbitragevaluesforcommodity
forwardsandfutures,andexplaintherelationshipbetweenleaseratesandcontangoand
leaseratesandbackwardation,respectively.
Definecarrymarkets.
Explaintheimpactstoragecostsandconvenienceyieldshaveoncommodityforwardprices
andnoarbitragebounds.
Computetheforwardpriceofacommoditywithstoragecosts.
Comparetheleaseratewiththeconvenienceyield.
Discussfactorsthatimpactgold,corn,naturalgas,andcrudeoilfuturesprices.
Defineandcomputeacommodityspread.
Explainhowbasisriskcanoccurwhenhedgingcommoditypriceexposure.
Evaluatethedifferencesbetweenastriphedgeandastackhedgeandanalyzehowthese
differencesimpactriskmanagement.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page26of86

HelyetteGeman,CommoditiesandCommodityDerivatives:ModelingandPricingfor
Agriculturals,MetalsandEnergy(WestSussex,England:Wiley,2005)
Chapter1FundamentalsofCommoditySpotandFuturesMarkets:Instruments,
ExchangesandStrategies

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definebilloflading.
Definethemajorrisksinvolvedwithcommodityspottransactions.
Differentiatebetweenordinaryandextraordinarytransportationrisks.
Explainthemajordifferencesbetweenspot,forward,andfuturestransactions,markets,
andcontracts.
Describebasicriskanditskeycomponents.
Describethebasiccharacteristicsanddifferencesbetweenhedgers,speculators,and
arbitrageurs.
Describeanarbitrageportfolioandexplaintheconditionsforamarkettobearbitrage
free.
Definebasisriskandthevarianceofthebasis.
Identifyacommonlyusedmeasurefortheeffectivenessofhedgingaspotpositionwitha
futurescontract;usethismeasuretocomputeandcomparetheeffectivenessofalternative
hedges.
DefineanddifferentiatebetweenanExchangeforPhysicalandagreementandan
AlternativeDeliveryProcedure.
Describeonecommonmeasureofmarketdepth.

AnthonySaundersandMarciaMillonCornett,FinancialInstitutionsManagement:ARisk
ManagementApproach,6thEdition(NewYork:McGrawHill,2008).
Chapter14ForeignExchangeRisk

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Calculateafinancialinstitutionsoverallforeignexchangeexposure.
Demonstratehowafinancialinstitutioncouldalteritsnetpositionexposuretoreduce
foreignexchangerisk.
Calculateafinancialinstitutionspotentialdollargainorlossexposuretoaparticular
currency.
Listanddescribethedifferenttypesofforeignexchangetradingactivities.
Identifythesourcesofforeignexchangetradinggainsandlosses.
Calculatethepotentialgainorlossfromaforeigncurrencydenominatedinvestment.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page27of86

Explainbalancesheethedgingwithforwards.
Describehowanonarbitrageassumptionintheforeignexchangemarketsleadstothe
interestrateparitytheorem;usethistheoremtocalculateforwardforeignexchangerates.
Explainwhydiversificationinmulticurrencyassetliabilitypositionscouldreduceportfolio
risk.
Describetherelationshipbetweennominalandrealinterestrates.

AnthonySaundersandMarciaMillonCornett,FinancialInstitutionsManagement:ARisk
ManagementApproach,6thEdition(NewYork:McGrawHill,2008).
Appendix15AMechanismsforDealingwithSovereignRiskExposure

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definefouralternativemechanismsfordealingwithproblemsovereigncredits.
Describethemajorincentivesanddisincentivesforparticipantsinadebtforequityswap,
includingtaxconsiderationsandtheimpactofregulatoryconstraints.
Describetheadvantagesanddisadvantagesofmultiyearrestructuringagreements.
Definethemajorelementsofamultiyearrestructuringagreement,including
concessionality.
Describethemajorbenefitsandcostsofloansales.
Describethemajorbenefitsandcostsofbondforloanswaps.

FrankFabozzi,TheHandbookofFixedIncomeSecurities,7thedition(NewYork:McgrawHill,
2005)
Chapter13CorporateBonds

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describeabondindentureandexplaintheroleofthecorporatetrustee.
Explainabondsmaturitydateandhowitimpactsbondretirements.
Describethemaintypesofinterestpaymentclassifications.
Describezerocouponbonds,therelationshipbetweenoriginalissuediscountand
reinvestmentrisk,andthetreatmentofzeroesinbankruptcy.
Describethevarioussecuritytypesrelevantforcorporatebonds,including:
o Mortgagebonds
o Collateraltrustbonds

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page28of86

o Equipmenttrustcertificates
o Debenturebonds(includingsubordinatedandconvertibledebentures)
o Guaranteedbonds
Describethemechanismsbywhichcorporatebondscanberetiredbeforematurity,
including:
o Callprovisions
o Sinkingfundprovisions
o Maintenanceandreplacementfunds
o Tenderoffers
Describe,anddifferentiatebetweencreditdefaultriskandcreditspreadrisk.
Describeeventriskandwhatmaycauseitincorporatebonds.
Definehighyieldbonds,describetypesofhighyieldbondissuers,andsomeofthe
paymentfeaturespeculiartohighyieldbonds.
Defineanddifferentiatebetweenanissuerdefaultrateandadollardefaultrate.
Definerecoveryratesanddescribetherelationshipbetweenrecoveryratesandseniority.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page29of86

ValuationandRiskModels(LevelITopic)
LevelIExamWeight:30%,FullExamWeight:15%

ValueatRisk(VaR)
o Definitionandmethods
o Deltanormalvaluation,fullrevaluation,historicalsimulation,MonteCarlo
simulationmethods
ApplicationsofVaRformarket,creditandoperationalrisk
VaRoflinearandnonlinearderivatives
VaRforfixedincomesecuritieswithembeddedoptions
StructuredMonteCarlo
Termstructureofinterestrates
Discountfactors,arbitrage,yieldcurves
Bondprices,spotrates,forwardrates
DV01,durationandconvexity,durationbasedhedging
Creditratingagencies,creditratings
Credittransitionmatrices
Sovereignriskandcountryriskevaluation
Binomialtrees
BlackScholesMertonmodel
Greeks
Stresstestingandscenarioanalysis

ReadingsforValuationandRiskModels

18. LindaAllen,JacobBoudoukhandAnthonySaunders,UnderstandingMarket,Creditand
OperationalRisk:TheValueatRiskApproach(Oxford:BlackwellPublishing,2004).
Chapter2QuantifyingVolatilityinVaRModels
Chapter3PuttingVaRtoWork
Chapter5ExtendingtheVaRApproachtoOperationalRisks

19. Hull,Options,Futures,andOtherDerivatives,7thEdition
Chapter11BinomialTrees
Chapter13TheBlackScholesMertonModel
Chapter17TheGreekLetters

20. BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter1BondPrices,DiscountFactors,andArbitrage
Chapter2BondPrices,SpotRates,andForwardRates
Chapter3YieldtoMaturity
Chapter5OneFactorMeasuresofPriceSensitivity

21. Jorion,ValueatRisk,3rdEdition.
Chapter14StressTesting

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page30of86

22. Caouette,Altman,Narayanan,andNimmo,ManagingCreditRisk,2ndEdition
Chapter6TheRatingAgencies
Chapter23CountryRiskModels

23. ArnauddeServignyandOlivierRenault,MeasuringandManagingCreditRisk,(New
York:McGrawHill,2004).
Chapter2ExternalandInternalRatings

24. SaundersandCornett,FinancialInstitutionsManagement,6thEdition.
Chapter15(excludingAppendix15A)SovereignRisk

25. MichaelOng,InternalCreditRiskModels:CapitalAllocationandPerformance
Measurement(London:RiskBooks,2003).
Chapter4LoanPortfoliosandExpectedLoss
Chapter5UnexpectedLoss

26. PrinciplesforSoundStressTestingPracticesandSupervision(BaselCommitteeon
BankingSupervisionPublication,Jan2009).http://www.bis.org/publ/bcbs147.pdf.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page31of86

ReadingsforValuationandRiskModelsAIMS

LindaAllen,JacobBoudoukhandAnthonySaunders,UnderstandingMarket,Creditand
OperationalRisk:TheValueatRiskApproach(Oxford:BlackwellPublishing,2004).
Chapter2QuantifyingVolatilityinVaRModels

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Discusshowassetreturndistributionstendtodeviatefromthenormaldistribution.
Explainpotentialreasonsfortheexistenceoffattailsinareturndistributionanddiscussthe
implicationsfattailshaveonanalysisofreturndistributions.
Distinguishbetweenconditionalandunconditionaldistributions.
Discusstheimplicationsregimeswitchinghasonquantifyingvolatility.
ExplainthevariousapproachesforestimatingVaR.
Compareandcontrastparametricapproachesforestimatingconditionalvolatility,
includingthehistoricalstandarddeviationapproach,theRiskMetricsapproachandthe
GARCHapproach,anddiscusstheadvantagesanddisadvantagesofparametricmethods
forvolatilityforecasting.
Compareandcontrasttheuseofhistoricsimulation,multivariatedensityestimation,and
hybridmethodsforvolatilityforecasting.
Explaintheprocessofreturnaggregationinthecontextofvolatilityforecastingmethods.
Explainhowimpliedvolatilitycanbeusedtopredictfuturevolatilityanddiscussits
advantagesanddisadvantages.
Explaintheimplicationsofmeanreversioninreturnsandreturnvolatilityforforecasting
VaRoverlongtimehorizons.
Discusstheeffectsnonsynchronousdatahasonestimatingcorrelationanddescribe
approachesthatmitigatetheimpactofnonsynchronousdataonriskestimates.

LindaAllen,JacobBoudoukhandAnthonySaunders,UnderstandingMarket,Creditand
OperationalRisk:TheValueatRiskApproach(Oxford:BlackwellPublishing,2004).
Chapter3PuttingVaRtoWork

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainandgiveexamplesoflinearandnonlinearderivatives.
ExplainhowtocalculateVaRforlinearderivatives.
DescribethedeltanormalapproachtocalculatingVaRfornonlinearderivatives.
Describethelimitationsofthedeltanormalmethod.
ExplainthefullrevaluationmethodforcomputingVaR.
Comparedeltanormalandfullrevaluationapproaches.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page32of86

ExplainstructuralMonteCarlo,stresstestingandscenarioanalysismethodsforcomputing
VaR,identifyingstrengthsandweaknessesofeachapproach.
Discusstheimplicationsofcorrelationbreakdownforscenarioanalysis.
Describeworstcasescenarioanalysis.

LindaAllen,JacobBoudoukhandAnthonySaunders,UnderstandingMarket,Creditand
OperationalRisk:TheValueatRiskApproach(Oxford:BlackwellPublishing,2004).
Chapter5ExtendingtheVaRApproachtoOperationalRisks

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethefollowingtopdownapproachestomeasuringoperationalrisks:
o Multifactormodels
o Incomebasedmodels
o Expensebasedmodels
o Operatingleveragemodels
o Scenarioanalysismodels
o Riskprofilingmodels
Describethefollowingbottomupapproachestomeasuringoperationalrisk:
o Processapproaches
Causalnetworksandscorecards
Connectivitymodels
Reliabilitymodels
o Actuarialapproaches
Empiricallossdistributions
Parametriclossdistributions
Extremevaluetheory
Compareandcontrasttopdownandbottomupapproachestomeasuringoperationalrisk.
Describewaystohedgeagainstcatastrophicoperationallosses.
Describethecharacteristicsofcatastropheoptionsandcatastrophebonds.
Describevariousmethodsofhedgingoperationalrisksanddiscussthelimitationsof
hedgingoperationalrisk.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page33of86

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter11BinomialTrees

AIMSAftercompletingthisreading,candidatesshouldbeableto:

CalculatethevalueofaEuropeancallorputoptionusingtheonestepandtwostep
binomialmodel.
CalculatethevalueofanAmericancallorputoptionusingatwostepbinomialmodel.
Discusshowthebinomialmodelvalueconvergesastimeperiodsareadded.
Describetheimpactdividendshaveonthebinomialmodel.
Discusshowvolatilityiscapturedinthebinomialmodel.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter13TheBlackScholesMertonModel

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthelognormalpropertyofstockprices,thedistributionofratesofreturn,andthe
calculationofexpectedreturn.
Computetherealizedreturnandhistoricalvolatilityofastock.
ListanddescribetheassumptionsunderlyingtheBlackScholesMertonoptionpricing
model.
ComputethevalueofaEuropeanoptionusingtheBlackScholesMertonmodelona
nondividendpayingstock.
Defineimpliedvolatilitiesanddescribehowtocomputeimpliedvolatilitiesfrommarket
pricesofoptionsusingtheBlackScholesMertonmodel.
ExplainhowdividendsaffecttheearlydecisionforAmericancallandputoptions.
ComputethevalueofaEuropeanoptionusingtheBlackScholesMertonmodelona
dividendpayingstock.
Identifythecomplicationsinvolvingthevaluationofwarrants.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter17TheGreekLetters

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Discussandassesstherisksassociatedwithnakedandcoveredoptionpositions.
Explainhownakedandcoveredoptionpositionsgenerateastoplosstradingstrategy.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page34of86

Definedeltahedgingforanoption,forward,andfuturescontracts.
Defineandcomputedeltaforanoption.
Discussthedynamicaspectsofdeltahedging.
Definethedeltaofaportfolio.
Describehowportfolioinsurancecanbecreatedthroughoptioninstrumentsandstock
indexfutures.
Define,computeanddescribetheta,gamma,vega,andrhoforoptionpositions.
Explainhowtoimplementandmaintainagammaneutralposition.
Discusstherelationshipbetweendelta,theta,andgamma.
Describehowhedgingactivitiestakeplaceinpractice,anddiscusshowscenarioanalysis
canbeusedtoformulateexpectedgainsandlosseswithoptionpositions.

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter1BondPrices,DiscountFactors,andArbitrage

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describeandcontrastindividualandmarketexpressionsofthetimevalueofmoney.
Definediscountfactoranduseadiscountfunctiontocomputepresentandfuturevalues.
Definethelawofoneprice,supportitusinganarbitrageargument,anddescribehowit
canbeappliedtobondpricing.
DiscussthecomponentsofaU.S.Treasurycouponbond,andcompareandcontrastthe
structuretoTreasurySTRIPS,includingthedifferencebetweenPSTRIPSandCSTRIPS.
Computethepriceofafixedincomesecuritywithcertaincashflowsandcompareitsvalue
tofixedincomesecuritieswithdifferent,butcertain,cashflowcharacteristics.
Identifyarbitrageopportunitiesforfixedincomesecuritieswithcertaincashflows.

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter2BondPrices,SpotRates,andForwardRates

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Calculateanddescribetheimpactofdifferentcompoundingfrequenciesonabondsvalue.
Calculateholdingperiodreturnsunderdifferentcompoundingassumptions.
Derivespotratesfromdiscountfactors.
Calculatethevalueofabondusingspotrates.
Defineandinterprettheforwardrate,andcomputeforwardratesgivenspotrates.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page35of86

Discusstheimpactofmaturityonthepriceofabondandthereturnsgeneratedbybonds.
RecognizethedifferencesyieldcurvecalculationsyieldwhenusingPStripsandCstrips.
Definerichandcheapratesinthecontextofyieldcurves.

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter3YieldtoMaturity

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Define,interpret,andapplyabondsyieldtomaturity(YTM)tobondpricing.
Computeabond'sYTMgivenabondstructureandprice.
EstablishtherelationshipbetweenspotratesandYTM.
Understandtherelationshipbetweencouponrate,YTM,andbondprices.
Defineanddescribe:
o Discountbond
o Premiumbond
o Couponeffect
o Pulltopar
Calculatethepriceofanannuity.
Calculatetherealizedreturnonabond.
Definereinvestmentrisk.

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter5OneFactorMeasuresofPriceSensitivity

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describefourwaysinwhichmeasuresoffixedincomepricesensitivityareused.
Describeaninterestratefactorandnamecommonexamplesofinterestratefactors.
DefineandcomputetheDV01ofafixedincomesecuritygivenachangeinyieldandthe
resultingchangeinprice.
ExplainthelimitationsofDV01asameasureofpricesensitivity.
CalculatethefaceamountofbondsrequiredtohedgeanoptionpositiongiventheDV01of
each.
Define,compute,andinterprettheeffectivedurationofafixedincomesecuritygivena
changeinyieldandtheresultingchangeinprice.
ContrastDV01andeffectivedurationasmeasuresofpricesensitivity.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page36of86

Define,compute,andinterprettheconvexityofafixedincomesecuritygivenachangein
yieldandtheresultingchangeinprice.
Calculatetheeffectivedurationandconvexityofaportfoliooffixedincomesecurity.
Explaintheeffectnegativeconvexityhasonthehedgingoffixedincomesecurities.

PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rdEdition
(NewYork:McGrawHill,2007).
Chapter14StressTesting

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethepurposesofstresstestingandtheprocessofimplementingastresstesting
scenario.
Explainthedifferenceineventdrivenscenariosandportfoliodrivenscenarios.
Identifycommononevariablesensitivitytests.
DescribetheStandardPortfolioAnalysisofRisk(SPAN)systemformeasuringportfolio
risk.
Discussthedrawbackstoscenarioanalysis.
Explainthedifferencebetweenunidimensionalandmultidimensionalscenarios.
Compareandcontrastvariousapproachestoscenarioanalysis.
Defineanddistinguishbetweensensitivityanalysisandstresstestingmodelparameters.
Explainhowtheresultsofastresstestcanbeusedtoimproveourriskanalysisandrisk
managementsystems.

JohnCaouette,EdwardAltman,PaulNarayananandRobertNimmo,ManagingCreditRisk:
TheGreatChallengefortheGlobalFinancialMarkets,2ndEdition(Hoboken,NJ:Wiley2008).
Chapter6TheRatingAgencies

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetheroleofratingagenciesinthefinancialmarkets.
Describesomeofthemarketandregulatoryforcesthathaveplayedaroleinthegrowthof
theratingagencies.
Describewhataratingscaleis,whatcreditoutlooksare,andthedifferencebetween
solicitedandunsolicitedratings.
o IdentifyStandardandPoorsandMoodysratingscalesanddistinguishbetween
investmentandnoninvestmentgraderatings.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page37of86

Describethedifferencebetweenanissuerpayandasubscriberpaymodelandwhat
concernstheissuerpaymodelengenders.
Describeandcontrasttheprocessforratingindustrialandsovereigndebtanddescribehow
thedistributionsoftheseratingsmaydiffer.
Discusstheratingsperformanceforcorporatebonds.
Describetherelationshipbetweentheratingagenciesandregulatorsandidentifykey
regulationsthatimpacttheratingagenciesandtheuseofratingsinthemarket
Discusssomeofthetrendsandissuesemergingfromthecurrentcreditcrisisrelevantto
theratingagenciesandtheuseofratingsinthemarket.

JohnCaouette,EdwardAltman,PaulNarayananandRobertNimmo,ManagingCreditRisk:
TheGreatChallengefortheGlobalFinancialMarkets,2ndEdition(Hoboken,NJ:Wiley2008).
Chapter23CountryRiskModels

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineanddifferentiatebetweencountryriskandtransferriskanddiscusssomeofthe
factorsthatmightleadtoeach.
Defineanddescribecontagion.
Identifyanddescribesomeofthemajorriskfactorsthatarerelevantforsovereignrisk
analysis.
Compareandcontrastcorporateandsovereignhistoricaldefaultratepatterns
Describehowcountryriskratingsareusedinlendingandinvestmentdecisions.
Describesomeofthechallengesincountryriskanalysis.

ArnauddeServignyandOlivierRenault,MeasuringandManagingCreditRisk,(NewYork:
McGrawHill,2004).
Chapter2ExternalandInternalRatings

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describeexternalratingscales,theratingprocess,andthelinkbetweenratingsand
default.
Discusstheimpactoftimehorizon,economiccycle,industry,andgeographyonexternal
ratings.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page38of86

Reviewtheresultsandexplanationoftheimpactofratingschangesonbondandstock
prices.
Explainandcomparethethroughthecycleandatthepointapproachestoscorea
company.
Describetheprocessforandissueswithbuilding,calibratingandbacktestinganinternal
ratingsystem.
Defineandexplainaratingstransitionmatrixanditselements.
Identifyanddescribethebiasesthatmayaffectaratingsystem.

AnthonySaundersandMarciaMillonCornett,FinancialInstitutionsManagement:ARisk
ManagementApproach,6thEdition(NewYork:McGrawHill,2008).
Chapter15(excludingAppendix15A)SovereignRisk

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthedifferencesbetweencreditriskandsovereignrisk
Comparedebtrepudiationversusdebtrescheduling
Explaintheroleofthefollowingvariablesincountryriskevaluation
o Debtserviceratio
o Importratio
o Investmentratio
o Varianceofexportratio
o Domesticmoneysupplygrowth
Explainthecommonproblemswithstatisticalcountryriskevaluationmodels

MichaelOng,InternalCreditRiskModels:CapitalAllocationandPerformanceMeasurement
(London:RiskBooks,2003).
Chapter4LoanPortfoliosandExpectedLoss

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetheobjectivesofmeasuringcreditriskforabanksloanportfolio.
Define,calculateandinterprettheexpectedlossforanindividualcreditinstrument.
Distinguishbetweenloanandbondportfolios.
Explainhowacreditdowngradeorloandefaultaffectsthereturnofaloan.
Distinguishbetweenexpectedandunexpectedloss.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page39of86

Defineexposures,adjustedexposures,commitments,covenants,andoutstandings.
o Explainhowdrawnandundrawnportionsofacommitmentaffectexposure.
o Explainhowcovenantsimpactexposures.
Defineusagegivendefaultandhowitimpactsexpectedandunexpectedloss.
o Explaincreditoptionality.
Describetheprocessofparameterizingcreditriskmodelsanditschallenges.

MichaelOng,InternalCreditRiskModels:CapitalAllocationandPerformanceMeasurement
(London:RiskBooks,2003).
Chapter5UnexpectedLoss

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explaintheobjectiveforquantifyingbothexpectedandunexpectedloss.
Describefactorscontributingtoexpectedandunexpectedloss.
Define,calculateandinterprettheunexpectedlossofanasset.
Explaintherelationshipbetweeneconomiccapital,expectedlossandunexpectedloss.

PrinciplesforSoundStressTestingPracticesandSupervision(BaselCommitteeonBanking
SupervisionPublication,Jan2009).http://www.bis.org/publ/bcbs147.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetherationalefortheuseofstresstestingasariskmanagementtool.
Describeweaknessesidentifiedandrecommendationsforimprovementin:
o Theuseofstresstestingandintegrationinriskgovernance
o Stresstestingmethodologies
o Stresstestingscenarios
o Stresstestinghandlingofthefollowingspecificrisks:
Risksarisingfromtheuseofcomplexstructuredproducts
Basisrisk
Wrongwayrisk
Pipelinerisk
Contingentrisk
Fundingrisk

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page40of86

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page41of86

MarketRiskMeasurementandManagement
LevelIIExamWeight:20%,FullExamWeight:10%

Volatilitysmilesandvolatilitytermstructures
Exoticoptions
Durationandconvexityoffixedincomesecurities
Termstructuremodels
BacktestingVaR
Mappingfinancialinstrumentstoriskfactors
Expectedshortfallandcoherentriskmeasures
Extremevaluetheory
Copulasandtaildependence
Mortgagesandmortgagebackedsecurities
o Underwritingmortgages
o Prepaymentmodels
o Risksinmortgagesandmortgagebackedsecurities
o Valuationofmortgagebackedsecurities

ReadingsforMarketRiskMeasurementandManagement

27. Hull,Options,Futures,andOtherDerivatives,7thEdition.
Chapter18VolatilitySmiles
Chapter24ExoticOptions

28. Tuckman,FixedIncomeSecurities,2ndEdition.
Chapter6MeasuresofPriceSensitivityBasedonParallelYieldShifts
Chapter7KeyRateandBucketExposures
Chapter9TheScienceofTermStructureModels
Chapter21MortgageBackedSecurities

29. Jorion,ValueatRisk,3rdEdition.
Chapter6BacktestingVaR
Chapter11VaRMapping

30. KevinDowd,MeasuringMarketRisk,2ndEdition(WestSussex,England:Wiley,2005).
Chapter2MeasuresofFinancialRisk
Chapter5AppendixModelingDependence:CorrelationsandCopulas
Chapter7ParametricApproaches(II):ExtremeValue

31. FrankFabozzi,HandbookofMortgageBackedSecurities6thedition(NewYork:Mcgraw
Hill,2006).
Chapter1AnOverviewofMortgagesandtheMortgageMarket
Chapter31ValuationofMortgageBackedSecurities

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page42of86

ReadingsforMarketRiskMeasurementandManagementAIMS

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter18VolatilitySmiles

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definevolatilitysmileandvolatilityskew.
Explainhowputcallparityindicatesthattheimpliedvolatilityusedtopricecalloptionsis
thesameusedtopriceputoptions.
Relatetheshapeofthevolatilitysmile(orskew)totheshapeoftheimplieddistributionof
theunderlyingassetpriceandtothepricingofoptionsontheunderlyingasset.
Explainwhyforeignexchangeratesarenotnecessarilylognormallydistributedandthe
implicationsthiscanhaveonoptionpricesandimpliedvolatility.
Discussthevolatilitysmileforequityoptionsandgivepossibleexplanationsforitsshape.
Describealternativewaysofcharacterizingthevolatilitysmile.
Describevolatilitytermstructuresandvolatilitysurfacesandhowtheymaybeusedtoprice
options.
ExplaintheimpactofthevolatilitysmileonthecalculationoftheGreeks.
Explaintheimpactofassetpricejumpsonvolatilitysmiles.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter24ExoticOptions

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineandcontrastexoticderivativesandplainvanilladerivatives.
Describesomeofthefactorsthatdrivethedevelopmentofexoticproducts.
Explainhowanyderivativecanbeconvertedintoazerocostproduct.
ListanddescribehowvariousoptioncharacteristicscantransformstandardAmerican
optionsintononstandardAmericanoptions.
Listanddescribethecharacteristicsandpayoffstructureof:
o Forwardstartoptions
o Compoundoptions
o Chooserandbarrieroptions
o Binaryoptions
o Lookbackoptions
o Shoutoptions

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page43of86

o Asianoptions
o Exchangeoptions
o Rainbowoptions
o Basketoptions
Describeandcontrastvolatilityandvarianceswaps.
Explainthebasicpremiseofstaticoptionreplicationandhowitcanbeappliedtohedging
exoticoptions.

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter6MeasuresofPriceSensitivityBasedonParallelYieldShifts

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describeadvantages,disadvantages,andlimitationsoftheuseofpricesensitivitiesbased
onparallelshiftsoftheyieldcurve.
DefineandcalculateyieldbasedDV01,modifiedduration,andMacaulayduration.
CalculateanddescribetheMacaulaydurationofzerocouponbonds,parbonds,and
perpetuities.
Explainhowcouponrate,maturity,andyieldimpactthedurationandDV01ofafixed
incomesecurity.
DefineDV01intermsofMacaulaydurationandusethisdefinitiontoexplainand
differentiatebetweenthedurationeffectandthepriceeffect.
Defineyieldbasedconvexityandexplainhowyieldbasedconvexitychangesforchangesin
maturity.
Explainthedifferencebetweenabarbellandabulletportfolioandanalyzetheimpact
convexitymayhaveonboth.

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter7KeyRateandBucketExposures

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describeandanalyzethemajorweaknessattributabletosinglefactorapproacheswhen
hedgingportfoliosorimplementingassetliabilitytechniques.
Describekeyrateshiftanalysis.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page44of86

Define,calculate,andinterpretkeyrate01andkeyrateduration.
Describethekeyrateexposuretechniqueinmultifactorhedgingapplicationsanddiscussits
advantagesanddisadvantages.
Calculatethekeyrateexposuresforagivensecurity,andcomputetheappropriatehedging
positionsgivenaspecifickeyrateexposureprofile.
Discusssomeoftheconsiderationsinchoosingkeyrates.
Discusswhyhedgesbasedonkeyratesonlyapproximateanimmunizedpositioninthe
underlyingassets.
Describetherelationshipbetweenkeyrateandbucketexposures.
Explainthemaindifferencesbetweenthekeyrateshiftandthebucketshiftapproachto
manageinterestraterisks.
Explainhowkeyrateandbucketanalysismaybeappliedinestimatingportfoliovolatility.

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter9TheScienceofTermStructureModels

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Usingreplicatingportfoliosdevelopanduseanarbitrageargumenttopriceacalloptionon
azerocouponsecurity.Inaddition:
o Explainwhytheoptioncannotbeproperlypricedusingexpecteddiscounted
values.
o Explaintheroleofupstateanddownstateprobabilitiesintheoptionvaluation.
Defineriskneutralpricingandexplainhowitisusedinoptionpricing.
Relatethedifferencebetweentrueandriskneutralprobabilitiestointerestratedrift.
Explainhowtheprinciplesofarbitragepricingofderivativesonfixedincomesecuritiescan
beextendedovermultipleperiods.
Describetherationalebehindtheuseofnonrecombiningtreesinoptionpricing.
CalculatethevalueofaconstantmaturityTreasureswap,givenaninterestratetreeand
theriskneutralprobabilities.
Discusstheadvantagesanddisadvantagesofreducingthesizeofthetimestepsonthe
pricingofderivativesonfixedincomesecurities.
ExplainwhytheBlackScholesMertonmodeltovalueequityderivativesisnotappropriate
tovaluederivativesonfixedincomesecurities.
Describetheimpactofembeddedoptionsonthevalueoffixedincomesecurities.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page45of86

BruceTuckman,FixedIncomeSecurities,2ndEdition(Hoboken,NJ:Wiley&Sons,2002).
Chapter21MortgageBackedSecurities

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Withrespecttomortgagebackedsecurities,define:mortgage,primarymarket,secondary
market,passthrough.
Calculateinterestandprincipalpaymentsforalevelpaymentmortgage.
Defineahomeownersprepaymentoptionandrelateittoabondscalloption.
Describetheimpactofinterestratechangesonthevalueoftheprepaymentoptionand
discussnoninterestratefactorsthatmaytriggermortgageprepayments.
Defineanddescribeinthecontextofmortgages:currentcouponrate,dueonsale,lockin
effect,points,mediaeffect,burnouteffect.
Describereasonswhyactualmortgageprepaymentsbehaviormaybesuboptimalfroma
financialvaluationperspective.
Discussthemainfeaturesaswellastheadvantagesanddisadvantagesofusingstaticcash
flow,implied,andprepaymentmodelsinthepricingofmortgagebackedsecurities.
Describethemajorcomponentsofprepaymentmodelsandhoweachvariableimpacts
prepayments.
Explainpathdependenceandpathindependenceasitrelatestothevaluationofmortgage
backedsecurities.
DescribehowMonteCarlosimulationcanbeusedtoaddressissuesofpathdependence.
DiscusstheadvantagesanddisadvantagesofMonteCarlosimulationforvaluingoptions.
DiscussthecalculationofOAS(optionadjustedspread)whenusingMonteCarlo
simulationsformortgagebackedsecuritypricing.
Comparetheimpactofinterestratechangesonanonrepayablemortgageandamortgage
passthroughsecurity.
DescribethemajorfeaturesofCMOs(collateralizedmortgageobligations),PAC(planned
amortizationclass)bonds,andIO(interestonly)andPO(principalonly)strips.
DiscusstheimpactofinterestratesandprepaymentsondifferentportionsofCMOs,IOand
POstrips.

PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3 rdEdition
(NewYork:McGrawHill,2007).
Chapter6BacktestingVaR

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DefinebacktestingandexceptionsandexplaintheimportanceofbacktestingVaRmodels.
ExplainthesignificantdifficultiesinbacktestingaVaRmodel.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page46of86

Explaintheframeworkofbacktestingmodelswiththeuseofexceptionsorfailurerates.
DefineandidentifytypeIandtypeIIerrors.
Explainwhyitisnecessarytoconsiderconditionalcoverageinthebacktestingframework.
DescribetheBaselrulesforbacktesting.

PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rdEdition
(NewYork:McGrawHill,2007).
Chapter11VaRMapping

AIMSAftercompletingthisreading,candidatesshouldbeableto:

ExplaintheprinciplesunderlyingVaRMapping,listanddescribethemappingprocess.
Explainhowthemappingprocesscapturesgeneralandspecificrisks.
Listanddescribethethreemethodsofmappingportfoliosoffixedincomesecurities.
Mapafixedincomeportfoliointopositionsofstandardinstruments.
Discusshowmappingofriskfactorscansupportstresstesting.
ExplainhowVaRcanbeusedasaperformancebenchmark.
Describethemethodofmappingforwards,commodityforwards,forwardrateagreements,
andinterestrateswaps.
Describethemethodofmappingoptions.

KevinDowd,MeasuringMarketRisk,2ndEdition(WestSussex,England:Wiley,2005).
Chapter2MeasuresofFinancialRisk

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethemeanvarianceframeworkandtheefficientfrontier.
Explainthelimitationsofthemeanvarianceframeworkwithrespecttoassumptionsabout
thereturndistributions.
DefinetheValueatrisk(VaR)measureofrisk,andexplainthelimitationsofVaRwith
respecttoassumptionsaboutreturndistributions.
Definethepropertiesofacoherentriskmeasureandexplainthemeaningofeachproperty.
Explainandcalculateexpectedshortfall(ES),andcompareandcontrastVaRandES.
ExplainhowVaRandESarespecialcasesofspectralmeasures.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page47of86

Describehowtheresultsofscenarioanalysiscanbeinterpretedascoherentriskmeasures.
Describeandinterprettheimportanceofskewnessandkurtosisinriskmeasurement.

KevinDowd,MeasuringMarketRisk,2ndEdition(WestSussex,England:Wiley,2005).
Chapter5AppendixModelingDependence:CorrelationsandCopulas

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthedrawbacksofusingcorrelationtomeasuredependence.
Describehowcopulasprovideanalternativemeasureofdependence.
Identifybasicexamplesofcopulas.
Explainhowtaildependencecanbeinvestigatedusingcopulas.

KevinDowd,MeasuringMarketRisk,2ndEdition(WestSussex,England:Wiley,2005).
Chapter7ParametricApproaches(II):ExtremeValue

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explaintheimportanceandchallengesofextremevaluesforriskmanagement.
Describeextremevaluetheory(EVT)anditsuseinriskmanagement.
Describethepeaksoverthreshold(POT)approach.
ComparegeneralizedextremevalueandPOT.
DescribetheparametersofageneralizedPareto(GP)distribution.
ExplainthetradeoffsinsettingthethresholdlevelwhenapplyingtheGPdistribution.
ComputeVaRandexpectedshortfallusingthePOTapproach,givenvariousparameter
values.
ExplaintheimportanceofmultivariateEVTforriskmanagement.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page48of86

FrankFabozzi,HandbookofMortgageBackedSecurities6thedition(NewYork:McgrawHill,
2006).
Chapter1AnOverviewofMortgagesandtheMortgageMarket

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineandexplainthekeycharacteristicsofamortgagecontract,including:
o Lienstatus
o Originalloanterm
o Interestratetype
o Creditguarantees
o Loanbalance
o Borrowertype
Describeandcalculatethemortgagepaymentfactor.
Identifygraphicallytheeffectloantermandinterestrateshaveonloanbalanceovertime.
Identifyandexplaintherolesofmajorplayersinthemortgageindustry.
Describetheloanunderwritingprocess,andexplainimportantmeasuresof
creditworthinessincluding:
o Creditscore
o Loantovalueratio
o Incomeratios
o Documentation
Describethevariousriskassociatedwithmortgagesandmortgagebackedsecuritiesand
explainriskbasedpricing.

FrankFabozzi,HandbookofMortgageBackedSecurities6thedition(NewYork:McgrawHill,
2006).
Chapter31ValuationofMortgageBackedSecurities

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describehowstaticvaluationofmortgagebackedsecuritiesdiffersfromdynamic
valuation.
Explaintheoptionadjustedspread(OAS)approachtovaluingmortgagebackedsecurities.
InterprettheOAS.
Defineoptionadjustedduration,optionadjustedconvexityandsimulatedaveragelife.
DescribetheOASapproachtovaluedifferenttypesofCMOsandhowtointerpretthe
resultsrelativetothoseprovidedbystaticanalysis.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page49of86

CreditRiskMeasurementandManagement
LevelIIExamWeight:20%,FullExamWeight:10%

Subprimemortgagesandsubprimesecuritization
CounterpartyriskandOTCderivatives
Creditderivatives,creditdefaultswapsandcreditlinkednotes
Structuredfinance,securitization,tranchingandsubordination
CollateralizedDebtObligations(pricingandriskmanagement)
Probabilityofdefault,lossgivendefaultandrecoveryrates
Creditscoring
Creditspreads
Expectedandunexpectedloss
ContingentclaimapproachandtheKMVModel
Defaultanddefaulttimecorrelations
Portfoliocreditrisk
Creditriskmanagementmodels
Riskmitigationtechniques(includingnetting,ratingtriggers,andcollateral)

ReadingsforCreditRiskMeasurementandManagement

32. AdamAshcroftandTilSchuermann,UnderstandingtheSecuritizationofSubprime
MortgageCredit,FederalReserveBankofNewYorkStaffReports,no.318(March2008).
Copyofarticleisavailableatwww.GARPDigitalLibrary.org.

33. EduardoCanabarroandDarrellDuffie,MeasuringandMarkingCounterpartyRiskin
ALMofFinancialInstitutions,ed.LeoTilman(London:EuromoneyInstitutional
Investor,2003).Copyofarticleisavailableatwww.GARPDigitalLibrary.org.

34. ChristopherCulp,StructuredFinanceandInsurance:TheArtofManagingCapitaland
Risk(Hoboken,NJ:Wiley&Sons,2006).
Chapter12CreditDerivativesandCreditLinkedNotes
Chapter13TheStructuringProcess
Chapter16Securitization
Chapter17CashCollateralizedDebtObligations
Chapter18SyntheticCollateralizedDebtObligations

35. Caouette,Altman,NarayananandNimmo,ManagingCreditRisk,2ndEdition.
Chapter18IntroductiontoPortfolioApproaches
Chapter19EconomicCapitalandCapitalAllocation
Chapter20ApplicationofPortfolioApproaches

36. deServignyandRenault,MeasuringandManagingCreditRisk.
Chapter3DefaultRisk:QuantitativeMethodologies
Chapter4LossGivenDefault

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page50of86

37. Hull,Options,Futures,andOtherDerivatives,7thEdition.
Chapter22CreditRisk
Chapter23CreditDerivatives

38. Allen,BoudoukhandSaunders,UnderstandingMarket,CreditandOperationalRisk
Chapter4ExtendingtheVaRApproachtoNontradableLoans

39. Stulz,RiskManagement&Derivatives.
Chapter18CreditRisksandCreditDerivatives

40. Ong,InternalCreditRiskModels:CapitalAllocationandPerformanceMeasurement.
Chapter6PortfolioEffects:RiskContributionsandUnexpectedLosses

41. Studiesoncreditriskconcentration:anoverviewoftheissuesandasynopsisoftheresults
fromtheResearchTaskForceproject(BaselCommitteeonBankingSupervision
Publication,November2006).Copyofthearticleisavailableat
www.GARPDigitalLibrary.org.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page51of86

ReadingsforCreditRiskMeasurementandManagementAIMS

AdamAshcroftandTilSchuermann,UnderstandingtheSecuritizationofSubprimeMortgage
Credit,FederalReserveBankofNewYorkStaffReports,no.318(March2008).Copyofarticleis
availableatwww.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

ExplainthesubprimemortgagecreditsecuritizationprocessintheUnitedStates.
Listanddiscusskeyfrictionsinthesubprimemortgagesecuritization.
o Assesstherelativecontributionofeachfactortothesubprimemortgageproblems.
Discussthecharacteristicsofthesubprimemortgagemarket,includingthe
creditworthinessofthetypicalborrower,thefeaturesandperformanceofasubprimeloan.
Explainthestructureofthesecuritizationprocessofthesubprimemortgageloans.
Discussthecreditratingsprocessinsubprimemortgagebackedsecurities.
Discusstheimplicationscreditratingshadontheemergenceofsubprimerelatedmortgage
backedsecurities.
Analyzetherelationshipbetweenthecreditratingscycleandthehousingcycle.
Discusstheimplicationsthesubprimemortgagemeltdownhasonthemanagementof
portfolios.
Discussthedifferencebetweenpredatorylendingandborrowing.

EduardoCanabarroandDarrellDuffie,MeasuringandMarkingCounterpartyRiskinALMof
FinancialInstitutions,ed.LeoTilman(London:EuromoneyInstitutionalInvestor,2003).Copyof
articleisavailableatwww.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definetermsrelatedtocounterpartyrisk.
IdentifyandexplainthestepsofusingaMonteCarlosimulationenginetomodelpotential
futureexposuretoacounterparty,anddiscussconsiderationsforapplyingsuchamodelto
variousmarketinstruments.
Describehowacreditvaluationadjustmentismadetoanoverthecounterderivatives
portfolio.
Defineariskneutralmeanlossrate.
Describetheproceduresforcomputingthemarketvalueofcreditriskwhenoneorboth
counterpartiesinthederivativestransactionhascreditexposure.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page52of86

ChristopherCulp,StructuredFinanceandInsurance:TheArtofManagingCapitalandRisk
(Hoboken,NJ:Wiley&Sons,2006).
Chapter12CreditDerivativesandCreditLinkedNotes

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethemechanicsofasinglenamedcreditdefaultswap(CDS),anddiscussparticular
aspectsofCDSssuchassettlementmethods,paymentstotheprotectionseller,reference
name,ownership,recoveryrights,triggerevents,accruedinterestandliquidity.
Describeportfoliocreditdefaultswaps,includingbasketCDS,NthtoDefaultCDS,Senior
andSubordinatedBasketCDS.
DiscussthecompositionanduseofiTraxxCDSindices.
Explainthemechanicsofassetdefaultswaps,equitydefaultswaps,totalreturnswapsand
creditlinkednotes.

ChristopherCulp,StructuredFinanceandInsurance:TheArtofManagingCapitalandRisk
(Hoboken,NJ:Wiley&Sons,2006).
Chapter13TheStructuringProcess

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetheobjectivesofstructuredfinanceandexplainthemotivationsforasset
securitization.
Describetheprocessandbenefitsofringfencingassets.
Discusstheroleofstructuredfinanceinventurecapitalformation,risktransfer,agencycost
reduction,andsatisfactionofspecificinvestordemands.
Explainthestepsinvolvedandthevariousplayersinastructuringprocess.
Defineanddescribetheprocessoftranchingandsubordination,anddiscusstheroleofloss
distributionsandcreditratings.

ChristopherCulp,StructuredFinanceandInsurance:TheArtofManagingCapitalandRisk
(Hoboken,NJ:Wiley&Sons,2006).
Chapter16Securitization

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definesecuritizationanddescribetheprocessandtheroletheparticipantsplay.
Analyzethedifferencesinthemechanicsofissuingsecuritizedproductsusingatrustor
specialpurposeentity.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page53of86

ListanddiscussthefourguidingprinciplesofFAS140andtheconditionsnecessarytobea
qualifiedspecialpurposevehicle.
DescribehowatypicalEnrontransactionviolatedFAS140andexplaintheantiEnronrule,
FIN46R.
Discussthevarioustypesofinternalandexternalcreditenhancementsandinterpreta
simplenumericalexample.
Explaintheimpactliquidity,interestrateandcurrencyriskhasonasecuritizedstructure,
andlistsecuritiesthathedgetheseexposures.
Discussthesecuritizationprocessformortgagebackedsecuritiesandassetbacked
commercialpaper.

ChristopherCulp,StructuredFinanceandInsurance:TheArtofManagingCapitalandRisk
(Hoboken,NJ:Wiley&Sons,2006).
Chapter17CashCollateralizedDebtObligations

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definecollateralizeddebtobligations(CDO)anddiscussthemotivationsofCDObuyers
andsellers.
DiscussthetypesofcollateralusedinCDOs.
DefineandexplainthestructureofbalancesheetCDOsandarbitrageCDOs.
DescribethebenefitsofandmotivationsforbalancesheetCDOsandarbitrageCDOs.
DiscusscashflowversusmarketvalueCDOs.
DiscussstaticversusmanagedportfoliosofCDOs.

ChristopherCulp,StructuredFinanceandInsurance:TheArtofManagingCapitalandRisk
(Hoboken,NJ:Wiley&Sons,2006).
Chapter18SyntheticCollateralizedDebtObligations

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DefineasyntheticCDO.
DescribefullyfundedandpartiallyfundedsyntheticCDOs.
DescribetheregulatorycapitalconsiderationsforfullyfundedandpartiallyfundedCDOs.
DescribethebenefitsofsyntheticCDOs.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page54of86

DescribesecondgenerationsyntheticCDOstructuresincludingsingletranchesynthetic
CDOs,resecuritizationsandCDOsquared,singletrancheCDOsquaredandmasterCDO.
CompareandcontrastsyntheticCDOsandinsurance,anddiscussregulatorydifferences.

JohnCaouette,EdwardAltman,PaulNarayananandRobertNimmo,ManagingCreditRisk:
TheGreatChallengefortheGlobalFinancialMarkets,2ndEdition(Hoboken,NJ:Wiley2008).
Chapter18IntroductiontoPortfolioApproaches

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthedifficultiesinapplyingthestandardmeanvarianceportfoliotheorytoafixed
incomecreditportfolio.
Explaintheconceptsofexpectedandunexpectedloss.
Discusstheuseofoptimizationproblemtooptimizecapitalusage.
o Describetheformulationofaportfoliooptimizationproblemtominimize
unexpectedlosses.

JohnCaouette,EdwardAltman,PaulNarayananandRobertNimmo,ManagingCreditRisk:
TheGreatChallengefortheGlobalFinancialMarkets,2ndEdition(Hoboken,NJ:Wiley2008).
Chapter19EconomicCapitalandCapitalAllocation

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineeconomiccapital.
Explainthecostplusprofitpricingapproachforcreditrisk,anddiscussthestrengthsand
weaknessesofthisapproach.
Define,compareandcontrastcommonriskadjustedperformancemeasures:
o Returnonassets(ROA)
o Returnonequity(ROE)
o VaR
o Marktomarket
o Marktomodel
o Returnonriskadjustedassets(RORAA)
o Riskadjustedreturnonassets(RAROC)
Explainthedifferencebetweeneconomiccapitalandregulatorycapital

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page55of86

JohnCaouette,EdwardAltman,PaulNarayananandRobertNimmo,ManagingCreditRisk:
TheGreatChallengefortheGlobalFinancialMarkets,2ndEdition(Hoboken,NJ:Wiley2008).
Chapter20ApplicationofPortfolioApproaches

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Discusshowtheconceptsofdiversificationandriskneutralpricinghavebeenappliedto
creditrisk.
IdentifythebasiccomponentsoftheCreditMetricsmethodology.
Computespecifictransitionprobabilitiesfromatransitionmatrix.
Explainhowtheforwardpricedistributionforabondorloaniscomputed.
ExplaintheCreditMetricsprocedureforestimatingjointmigrationanddefault
probabilities,anddiscusstheunderlyingassumptions.
Compareandcontrastdifferentapplicationsofcreditportfolioapproachesincluding
MoodysKMVPortfolioManager,CreditMetrics,CreditRisk+,theMcKinsy/WilsonModel,
KamakurasPortfolioManagerandAltmansoptimizationapproach.

ArnauddeServignyandOlivierRenault,MeasuringandManagingCreditRisk,(NewYork:
McGrawHill,2004).
Chapter3DefaultRisk:QuantitativeMethodologies

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribetheMertonmodelforcorporatesecuritypricing,includingitsassumptions,
strengthsandweaknesses.
o IllustrateandinterpretsecurityholderpayoffsbasedontheMertonmodel.
o UsingtheMertonmodel,calculatethevalueofafirm'sdebtandequityandthe
volatilityoffirmvalue.
o Discusstheresultsandpracticalimplicationsofempiricalstudiesthatusethe
Mertonmodeltovaluedebt
DescribetheMoodysKMVCreditMonitorModeltoestimateprobabilityofdefaultusing
equityprices.
o ComparetheMoodysKMV'sequitymodelwiththeMertonmodel.
Discusscreditscoringmodelsandtherequisitequalitiesofaccuracy,parsimony,non
triviality,feasibility,transparencyandinterpretability.
Defineanddifferentiateamongthefollowingquantitativemethodologiesforcredit
analysisandscoring:
o Lineardiscriminantanalysis
o Parametricdiscrimination
o Knearestneighborapproach
o Supportvectormachines

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page56of86

Defineanddifferentiatethefollowingdecisionrules:
o Minimumerror
o Minimumrisk
o NeymanPearson
o Minimax
Discusstheproblemsandtradeoffsbetweenclassificationandpredictionmodelsof
performance.
Discusstheimportantfactorsinthechoiceofaparticularclassofmodel.

ArnauddeServignyandOlivierRenault,MeasuringandManagingCreditRisk,(NewYork:
McGrawHill,2004).
Chapter4LossGivenDefault

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definelossgivendefault.
Identifyanddiscussfourfactorsthatmayleadtosuboptimalloanrecoveryrates.
Identifyanddiscusstheimpactofvariousfeaturesonrecoveryratesoftradedbonds,
including:
o Seniority
o Industrialsector
o Businesscycle
o Collateral
o Jurisdiction
Describetheimportanceofmodelinguncertainrecoveryrates.
Discussthebetadistributionapproach,kernelmodeling,andconditionalrecovery
modelingtoestimateoftherecoveryfunction.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter22CreditRisk

AIMSAftercompletingthisreading,candidatesshouldbeableto:

IdentifyratingsofMoodys,Standard&PoorsandFitchthatcorrespondtoinvestmentand
noninvestmentgradesecurities.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page57of86

Discussthehistoricalrelationshipbetweendefaultratesandrecoveryrates.
Estimatetheprobabilityofdefaultforacompanyfromitsbondprice.
Compareriskneutralversusrealworlddefaultprobabilities.
DescribeandapplyMertonsapproachtoestimatingdefaultprobabilitiesusingequity
prices.
Describecounterpartycreditriskinderivativesmarketsandexplainhowitaffects
valuation.
Describethefollowingcreditmitigationtechniques:
o Netting
o Collateralization
o Downgradetriggers
DiscusstheGaussiancopulamodelfortimetodefault.

JohnHull,Options,Futures,andOtherDerivatives,7thEdition(NewYork:PrenticeHall,2009).
Chapter23CreditDerivatives

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describeacreditdefaultswap(CDS),andexplainthefunctionsandusesofaCDS.
ComputethevalueofaCDS,givenunconditionaldefaultprobabilities,survival
probabilities,marketyields,recoveryratesandcashflows.
DiscussthepotentialasymmetricinformationproblemwithCDSs.
DiscusstheimplicationsofmarkingtomarketCDSs.
Discussconcernswithdefaultprobabilityandrecoveryrateestimates.
Identifyandexplainthefunctionsandusesof
o BasketCDSs.
o Totalreturnswaps.
Describeassetbackedsecuritiesincludingcollateralizeddebtobligations(CDOs)and
explain
o Tranches
o Roleofcreditratings
o SyntheticCDOs
o RoleofcorrelationinvaluingCDOs
DiscusstheuseoftheGaussianCopulaModeltomeasurethetimetodefault.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page58of86

LindaAllen,JacobBoudoukhandAnthonySaunders,UnderstandingMarket,Creditand
OperationalRisk:TheValueatRiskApproach(Oxford:BlackwellPublishing,2004).
Chapter4ExtendingtheVaRApproachtoNontradableLoans

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribethefollowingtraditionalapproachestomeasuringCreditRisk
o Expertsystems
o Ratingsystems
o Creditscoringmodels
Comparestructuralandreducedformmodelsforestimatingdefaultprobabilities.
DescribeMertonsoptiontheoreticmodeltoestimatedefaultprobabilities.
Explaintherelationshipbetweentheyieldspreadandtheprobabilityofdefault,and
calculatedefaultprobabilityofadebtsecurityusingthecreditspread.
DescribetheCreditMetricsandAlgorithmicsproprietaryVaRmodelsforcreditrisk
measurement.

RenStulz,RiskManagement&Derivatives(Florence,KY:ThomsonSouthWestern,2002).
Chapter18CreditRisksandCreditDerivatives

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explaintherelationshipofcreditspreads,timetomaturity,andinterestrates.
Explainthedifferencesbetweenvaluingseniorandsubordinateddebtusingacontingent
claimapproach.
Explain,fromacontingentclaimperspective,theimpactstochasticinterestrateshaveon
thevaluationofriskybonds,equity,andtheriskofdefault.
Assessthecreditrisksofderivatives.
DiscussthefundamentaldifferencesbetweenCreditRisk+,CreditMetricsandKMVcredit
portfoliomodels.
Defineanddescribeacreditderivative,creditdefaultswap,andtotalreturnswap.
Defineavulnerableoption,andexplainhowcreditriskcanbeincorporatedindetermining
theoption'svalue.
Discusshowtoaccountforcreditriskexposureinvaluingaswap.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page59of86

MichaelOng,InternalCreditRiskModels:CapitalAllocationandPerformanceMeasurement
(London:RiskBooks,2003).
Chapter6PortfolioEffects:RiskContributionsandUnexpectedLosses

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explaintherelationshipbetweenexpectedandunexpectedlossesforanindividualasset
andaportfolioofasset.
Compareexpectedlossandunexpectedlossriskmeasures.
Explainhowtherecoveryrate,creditquality,andexpecteddefaultfrequencyaffectthe
expectedandunexpectedloss.
Discussandcomparedifferentapproachestomitigatematurityeffects.
Define,calculateandinterpretexpectedandunexpectedportfolioloss.
Define,calculateandinterpretriskcontributionswithinaportfolio.
Explainthedifferentimpactdiversifiableandundiversifiableriskhasonportfolioexpected
andunexpectedloss,respectively.
Define,calculateandinterprettheeffectcorrelationhasontheexpectedandunexpected
lossesinaportfolio.

Studiesoncreditriskconcentration:anoverviewoftheissuesandasynopsisoftheresultsfrom
theResearchTaskForceproject(BaselCommitteeonBankingSupervisionPublication,November
2006).Copyofthearticleisavailableatwww.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineanddifferentiatebetweensystematicriskandidiosyncraticriskinthecontextofthe
BaselIIIRBmodel.
Describehowconcentrationriskmayariseinacreditportfolio.
DescribekeyassumptionsoftheAsymptoticSingleRiskFactor(ASRF)model.
DescribehowconcentrationriskinacreditportfolioviolatestheassumptionsoftheASRF
modelandwhattheimplicationsofthisare.
Discussimperfectgranularity,itsimpactoneconomiccapital,andproposedadjustments.
Discussthepotentialimpactofsectoralconcentrationoncapitalrequirementswithinthe
BaselIIIRBmodel.
Describecontagionriskinthecontextofcreditportfoliosandsomeofthedifficultiesin
estimatingit.
Describedesirablepropertiesforstresstestsofsectorconcentrationrisk,including:
o Plausibility
o Consistency
o Adaptabilitytotheportfolio

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page60of86

o Adaptabilitytointernalreportingrequirements
Describeopenissuesrelatedtomodelingconcentrationrisk,particularlythoserelatedto:
o Theadequacyofsectorschemes
o Thedefinitionofabenchmarkforconcentrationriskcorrection
o Datarelatedissues

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page61of86

OperationalandIntegratedRiskManagement
LevelIIExamWeight:20%,FullExamWeight:10%

Definitionofriskcapital
Allocationofriskcapitalacrossthefirm
Firmwideriskmeasurementandmanagement
Correlationsacrossmarket,credit,andoperationalrisk
Evaluatingtheperformanceofriskmanagementsystems
RegulationandtheBaselIIAccord
o Minimumcapitalrequirements
o Creditconcentrationrisk
o Liquidityrisk
o Stresstesting
Implementationandmodelrisk
Liquidityrisk
Economiccapitalandriskaggregation

ReadingsforOperationalandIntegratedRiskManagement

42. MichelCrouhy,DanGalaiandRobertMark,RiskManagement(NewYork:McGrawHill,
2001).
Chapter14CapitalAllocationandPerformanceMeasurement

43. Dowd,MeasuringMarketRisk,2ndEdition.
Chapter14EstimatingLiquidityRisks
Chapter16ModelRisk

44. EllenDavis(editor),OperationalRisk:PracticalApproachestoImplementation(London:
RiskBooks,2005).
Chapter12AligningBaselIIOperationalRiskandSarbanesOxley404Projects,by
NickBoltonandJudsonBerkey.

45. deServignyandRenault,MeasuringandManagingCreditRisk.
Chapter10Regulation

46. AndrewKuritzkes,TilSchuermannandScottM.Weiner.RiskMeasurement,Risk
ManagementandCapitalAdequacyinFinancialConglomerates,inBrookingsWharton
PapersonFinancialServicesRobertE.LitanandRichardHerring(eds)(Brookings
InstitutionalPress,Washington,DC:2003).Copyofarticleisavailableat
www.GARPDigitalLibrary.org.

47. BrianNoccoandRenStulz,EnterpriseRiskManagement:TheoryandPractice,
JournalofAppliedCorporateFinance18,No.4(2006):820.Copyofthearticleis
availableatwww.GARPDigitalLibrary.org.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page62of86

48. FalkoAueandMichaelKalkbrener,2007,LDAatWork,DeutscheBankWhitePaper.
Copyofthearticleisavailableatwww.GARPDigitalLibrary.org.

49. TilSchuermannandAndrewKuritzkes,WhatWeKnow,DontKnowandCantKnow
AboutBankRisk:AViewfromtheTrenches.
http://www.newyorkfed.org/research/economists/schuermann/Kuritzkes_Schuermann_KU
U_23Mar2008.pdf

50. SaundersandCornett,FinancialInstitutionsManagement,6thEdition.
Chapter17LiquidityRisk

ReadingsforBaselReference
CandidatesareexpectedtounderstandtheobjectiveandgeneralstructureoftheBasel
II Accord and general application of the various approaches for calculating minimum
capitalrequirements.Candidatesarenotexpectedtomemorizespecificdetailslikerisk
weightsfordifferentassets.

51. BaselII:InternationalConvergenceofCapitalMeasurementandCapital
Standards:ARevisedFrameworkComprehensiveVersion(BaselCommitteeon
BankingSupervisionPublication,June2006).Copyofthearticleisavailableat
www.GARPDigitalLibrary.org.

52. AnExplanatoryNoteontheBaselIIIRBRiskWeightFunctions(BaselCommittee
onBankingSupervisionPublication,July2005).Copyofthearticleisavailableat
www.GARPDigitalLibrary.org.

53. PrinciplesforSoundLiquidityRiskManagementandSupervision(Basel
CommitteeonBankingSupervisionPublication,September2008)
http://www.bis.org/publ/bcbs144.pdf.

54. GuidelinesforComputingCapitalforIncrementalRiskintheTradingBook
ConsultativeDocument(BaselCommitteeonBankingSupervisionPublication,
January2009)http://www.bis.org/publ/bcbs149.pdf.

55. RevisionstotheBaselIImarketriskframeworkConsultativeDocument(Basel
CommitteeonBankingSupervisionPublication,January2009)
http://www.bis.org/publ/bcbs148.pdf.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page63of86

ReadingsforOperationalandIntegratedRiskManagementAIMS

MichelCrouhy,DanGalaiandRobertMark,RiskManagement(NewYork:McGrawHill,2001).
Chapter14CapitalAllocationandPerformanceMeasurement

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribetheRAROC(riskadjustedreturnoncapital)methodologyanddiscusssomeofthe
potentialbenefitsofitsuse.
Define,compareandcontrasteconomicandregulatorycapital.
ComputeandinterprettheRAROCforaloanorloanportfolio,anduseRAROCtocompare
businessunitperformance.
Explainhowcapitalisattributedtomarket,credit,andoperationalrisk.
Calculatethecapitalchargeformarketriskandcreditrisk.
Explainthedifficultiesencounteredinattributingeconomiccapitaltooperationalrisk
DescribetheLoanEquivalentApproachanduseittocalculateRAROCcapital
ExplainhowthesecondgenerationRAROCapproachesimproveeconomiccapital
allocationdecisions
ComputetheadjustedRAROCforaprojecttodetermineitsviability.

KevinDowd,MeasuringMarketRisk,2ndEdition(WestSussex,England:Wiley,2005).
Chapter14EstimatingLiquidityRisks

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineliquidityriskanddescribefactorsthatinfluenceliquidity.
Discussthebidaskspreadasameasureofliquidity.
Defineexogenousandendogenousliquidity.
DescribethechallengesofestimatingliquidityadjustedVaR(LVaR)
DescribeandcalculateLVaRusingtheConstantSpreadapproachandtheExogenous
Spreadapproach.
DiscussEndogenousPriceapproachestoLVaR,itsmotivationandlimitations.
Discusstherelationshipbetweenliquidationstrategies,transactioncostsandmarketprice
impact.
Describeliquidityatrisk(LaR)anddiscussthefactorsthataffectfuturecashflows.
Explaintheroleofliquidityincrisissituationsanddiscussapproachestoestimatingcrisis
liquidityrisk.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page64of86

KevinDowd,MeasuringMarketRisk,2ndEdition(WestSussex,England:Wiley,2005).
Chapter16ModelRisk

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Definemodelrisk.
Identifyanddiscusssourcesofmodelrisk,including:
o Incorrectmodelspecification
o Incorrectmodelapplication
o Implementationrisk
o Incorrectcalibration
o Programminganddataproblems
Discussthechallengesinvolvedwithquantifyingmodelrisk.
Describemethodsforestimatingmodelrisk,givenanunknowncomponentfromafinancial
model.
Identifywaysriskmanagerscanprotectagainstmodelrisk.
Discusstheroleofseniormanagersinmanagingmodelrisk.
Describeproceduresforvettingandreviewingamodel.
Discussthefunctionofanindependentriskoversight(IRO)unit.

EllenDavis(editor),OperationalRisk:PracticalApproachestoImplementation(London:Risk
Books,2005).
Chapter12AligningBaselIIOperationalRiskandSarbanesOxley404Projects,byNick
BoltonandJudsonBerkey.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethefollowingprinciplesfordesigningoperationalriskmanagementframeworkas
outlinedintheSoundPracticesstudypublishedbyBISinFebruary2003:
o Boardapproval
o Independentinternalaudit
o Managementimplementation
o Riskidentificationandassessment
o Riskmonitoringandreporting
o Riskcontrolandmitigation
o Contingencyandcontinuityplanning
o Disclosure
DiscusstherequirementsoninternalcontrolsoverfinancialreportingdefinedinSection
404oftheSarbanesOxley(SOX)Actof2002.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page65of86

DiscussrelationshipbetweentheSOXrequirementsonfinancialreportingandtheBasel
requirementsonoperationalriskmanagement,andhowanoperationalriskmanagement
frameworkcanbedesignedtohelpmeetbothsetsofrequirements.

ArnauddeServignyandOlivierRenault,MeasuringandManagingCreditRisk,(NewYork:
McGrawHill,2004).
Chapter10Regulation

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Discusstheprimaryobjectivesofbankingregulation.
Discussthepotentialmoralhazardissuesassociatedwithdepositinsurance.
Describethetoobiggofaildoctrineanditspossibleconsequences.
Discussthemotivation,benefitsandweaknessesoftheoriginal1988BaselAccord.
IdentifytheprimarygoalsoftheBaselCommitteeindevelopingtheBaselIIAccord.
DescribethethreepillarsoftheBaselIIAccord.
Describehowthenecessarycomponentsforcalculatingcapitalrequirementsare
determinedunderthestandardizedandinternalratingsbased(IRB)approaches.
DiscusshowBaselIIaccountsforcreditriskmitigation.
DiscussthetreatmentofsecuritizationunderBaselII.
DiscusscommoncriticismsoftheBaselIIframework,inparticularwithrespecttoissues
withbestpractices,equality,fairness,uniformity,implementationandaccounting
standards.

AndrewKuritzkes,TilSchuermannandScottM.Weiner.RiskMeasurement,Risk
ManagementandCapitalAdequacyinFinancialConglomerates,inBrookingsWhartonPapers
onFinancialServicesRobertE.LitanandRichardHerring(eds)(BrookingsInstitutionalPress,
Washington,DC:2003).Copyofarticleisavailableatwww.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthesiloapproachtocapitalregulationforfinancialconglomerates,anddiscussits
limitations.
Describethechallengesaconglomeratecreatesforcapitalmanagement.
Discusshoweconomiccapitalcanserveasacommonstandardforassessingriskina
conglomerate.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page66of86

Describethebuildingblockapproachforaggregatingrisksatafinancialconglomerate.
Discussthefactorsthatdeterminethediversificationbenefitsfromriskaggregation.
Discussthediversificationbenefitsachievedateachofthethreelevelsofaggregationfora
financialconglomerate.
Describethehubandspokeorganizationalmodelforriskmanagementofafinancial
conglomerate.

BrianNoccoandRenStulz,EnterpriseRiskManagement:TheoryandPractice,Journalof
AppliedCorporateFinance18,No.4(2006):820.Copyofthearticleisavailableat
www.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineenterpriseriskmanagement(ERM).
ExplainhowimplementingERMpracticesandpoliciescreateshareholdervaluebothatthe
macroandthemicrolevel.
DiscusshowanERMprogramcanbeusedtodeterminetherightamountofrisk.
DiscussthedevelopmentandimplementationofanERMsystem.
Discusstherelationshipbetweeneconomicvalueandaccountingperformance.
Describetheroleofandissueswithcorrelationinriskaggregation.
Distinguishbetweenregulatoryandeconomiccapital.
Explaintheuseofeconomiccapitalinthecorporatedecisionmakingprocess.

FalkoAueandMichaelKalkbrener,2007,LDAatWork,DeutscheBankWhitePaper.Copyofthe
articleisavailableatwww.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribetheLossDistributionApproach(LDA)toquantifyingoperationalrisk.
DiscusssomeofthechallengeswithquantifyingoperationalriskwithanLDA.
Discussthedatasourcesthatcanbeincorporatedinalossdistributionmodel.
Explaintheissueswiththeuseofbothinternalandexternallossdataformodelingloss
distributions.
WithrespecttodevelopinganLDA,describethekeyfactorsandchallengesthatmustbe
consideredin:

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page67of86

o Derivationoffrequencyandseveritydistributions
o Estimationoftaildistributions
o Modelingcorrelation
o Incorporationofinsurance
Discussthevalidationoflossdistributionapproaches,includingsensitivityanalysis,stress
testing,backtestingandbenchmarking.

TilSchuermannandAndrewKuritzkes,WhatWeKnow,DontKnowandCantKnowAboutBank
Risk:AViewfromtheTrenches.
http://www.newyorkfed.org/research/economists/schuermann/Kuritzkes_Schuermann_KUU_23Ma
r2008.pdf

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineknownrisk,unknownriskandunknowablerisk,anddiscusstheclassificationof
marketrisk,creditrisk,structuralasset/liabilityrisk,operationalriskandbusinessriskas
known,unknownandunknowable.
ExplainhowtheBaselIIthreepillarframeworkaccommodatesknown,unknownand
unknowablerisks.
Fromtheanalysisprovidedinthepaper,discusstherelativecontributionsofmarketrisk,
creditrisk,structuralasset/liabilityrisk,operationalriskandbusinessrisktobankearnings
volatility.
o Discusstheimplicationsoftheresultsforregulatorypolicyandareasfor
improvementsinriskmanagement.

AnthonySaundersandMarciaMillonCornett,FinancialInstitutionsManagement:ARisk
ManagementApproach,6thEdition(NewYork:McGrawHill,2008).
Chapter17LiquidityRisk

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineliquidityriskanddescribehowitarisesfromaliabilityperspectiveandfromanasset
perspective.
o Discusshowadepositoryinstitutioncanmanageadrainondepositsusing
purchasedliquiditymanagementandstoredliquiditymanagement.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page68of86

Discusshowadepositoryinstitutionmeasuresitsliquiditypositionandidentifywaysitcan
obtainliquidfunds.
o Describetheuseofpeergroupratiocomparisonstomeasureliquidityexposureand
interpretthekeyratiossuchasloanstodepositsandborrowedfundstototal
assets.
o Describetheuseofaliquidityindex.
o Defineandcalculatethefinancinggapandfinancingrequirementofadepository
institution.
Describealiquidityplananditscomponents.
Discussreasonsforabnormaldepositdrainssuchasabankrun.
Explaintheroleofdepositinsuranceandthediscountwindowindecreasingliquidityrisk.
DescribetheroleliquidityplayedinthecollapseofLongTermCapitalManagement.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page69of86

ReadingsforBaselReferenceAIMS

BaselII:InternationalConvergenceofCapitalMeasurementandCapitalStandards:ARevised
FrameworkComprehensiveVersion(BaselCommitteeonBankingSupervisionPublication,June
2006).Copyofthearticleisavailableatwww.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribethekeyelementsofthethreepillarsofBaselII
o Minimumcapitalrequirements
o Supervisoryreview
o Marketdiscipline
DescribethetypeofinstitutionsthattheBaselIIAccordwillbeappliedto.
DescribethemajorriskcategoriescoveredbytheBaselIIAccord.
Describeandcontrastthemajorelementsofthethreeoptionsavailableforthecalculation
ofcreditrisk:
o StandardisedApproach
o FoundationIRBApproach
o AdvancedIRBApproach
Describeandcontrastthemajorelementsofthethreeoptionsavailableforthecalculation
ofoperationalrisk:
o BasicIndicatorApproach
o StandardisedApproach
o AdvancedMeasurementApproach
Describeandcontrastthemajorelementsincludingadescriptionoftheriskscoveredof
thetwooptionsavailableforthecalculationofmarketrisk:
o StandardisedMeasurementMethod
o InternalModelsApproach
DefineinthecontextofBaselIIandcalculatewhereappropriate:
o Capitalratioandcapitalcharge
o Riskweightsandriskweightedassets
o Tier1capitalanditscomponents
o Tier2capitalanditscomponents
o Tier3capitalanditscomponents
o Probabilityofdefault(PD)
o Lossgivendefault(LGD)
o Exposureatdefault(EAD)
o Maturity(M)
o Stresstests
o Concentrationrisk
o Residualrisk

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page70of86

AnExplanatoryNoteontheBaselIIIRBRiskWeightFunctions(BaselCommitteeonBanking
SupervisionPublication,July2005).Copyofthearticleisavailableatwww.GARPDigitalLibrary.org.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribetheregulatoryconcernunderpinningtheIRBapproachadoptedforBaselII.
DistinguishbetweenExpectedLosses(EL)andUnexpectedLosses(UL).
Describetheroleofprovisioning,writeoffs,andbankcapitalinabsorbingELandUL.
DefineValueatRisk(VaR)inthecontextoftheBaselIIIRBapproach,includingthe
confidencelevelusedandthereasoningbehinditsselection.
DefinetheriskparametersuponwhichtheBaselIIIRBapproachisbuilt,including:
o PD(probabilityofdefault)
o EAD(exposureatdefault)
o LGD(lossgivendefault)
o Conditionalexpectedloss
o ConditionalPD
o AveragePD
CalculateEL,inbothcurrencyamountsandasapercentageofEAD(exposureat
default),givenappropriatePD,EAD,andLGD.
DescribeportfolioinvarianceinthecontextofBaselriskweightfunctions,includingits
benefitsanddrawbacks.
DescribetheconceptualfeaturesoftheASRF(AsymptoticSingleRiskFactor)model
andhowitrelatestotheBaselriskweightfunctions,inparticularwithrespectto:
o PD,LGD,ELandUL
o Assetcorrelations
o Maturity
Calculatethetotaleconomicresourcesrequiredtocoverconditionalexpectedlosses
undertheASRFmodel.
Calculateriskweightedassets(RWA),givenanEADandcapitalrequirement(K).

PrinciplesforSoundLiquidityRiskManagementandSupervision(BaselCommitteeonBanking
SupervisionPublication,September2008)http://www.bis.org/publ/bcbs144.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Differentiatebetweenfundingliquidityriskandmarketliquidityrisk.
Describethebasiccharacteristicsofanappropriateliquidityrisktolerancepolicyand
howitshouldbeestablished.
Describetherolesandresponsibilitiesoftheboardofdirectorsandseniormanagement
indeveloping,implementing,andmanagingaliquidityriskmanagementstrategy.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page71of86

Describehowliquiditycosts,benefits,andrisksshouldbeincorporatedintointernal
pricing,performancemeasurement,andnewproductapproval.
Describetheimportantcharacteristicsoftheprocessabankshouldestablishfor
identifying,monitoring,andcontrollingliquidityrisk.
Describetheimportantcharacteristicsofliquiditymeasurementtools,liquidityrisk
limits,earlywarningindicators,monitoringandcontrolsystems.
Describekeycharacteristicsofeffectiveintradayliquidityriskmanagementand
effectivecollateralmanagement.
Describeessentialelementsofliquiditystresstesting.
Describetheroleofpublicdisclosureinsoundliquidityriskmanagement.

GuidelinesforComputingCapitalforIncrementalRiskintheTradingBookConsultative
Document(BaselCommitteeonBankingSupervisionPublication,January2009)
http://www.bis.org/publ/bcbs149.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explaintheregulatoryreasonforincorporatingtheincrementaldefaultriskchargeinto
thetradingbookcapitalcalculation.
DescribeperceivedshortcomingsintheoriginalVaRframeworkformeasuringriskin
thetradingbook.
Definetheriskscapturedbytheincrementalriskchargeandthekeysupervisory
parametersforcomputingtheincrementalriskcharge.
Definethefrequencywithwhichbanksmustcalculatetheincrementalriskcharge.
Calculatethecapitalchargeforincrementalriskasafunctionofrecentincrementrisk
chargemeasures.

RevisionstotheBaselIImarketriskframeworkConsultativeDocument(BaselCommitteeon
BankingSupervisionPublication,January2009)http://www.bis.org/publ/bcbs148.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribetheobjectivesforrevisingtheBaselIImarketriskframework.
Definethecapitalchargeforspecificriskandgeneralmarketrisk.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page72of86

Explaintherelationshipregulatorsrequirebetweenmarketriskfactorsusedforpricing
versusthoseusedforcalculatingvalueatriskandtheriskscapturedbythevalueat
riskmodel.
Explainandcalculatethestressedvalueatriskmeasureandthefrequencyatwhichit
mustbecalculated.
Explainandcalculatethemarketriskcapitalrequirement.
Describethequalitativedisclosuresfortheincrementalriskcapitalcharge.
Describethequantitativedisclosuresfortradingportfoliosundertheinternalmodels
approach.
Describetheregulatoryguidanceonprudentvaluationofilliquidpositions.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page73of86

RiskManagementandInvestmentManagement

LevelIIExamWeight:20%,FullExamWeight:10%

Portfolioconstruction
Riskdecompositionandperformanceattribution
Riskbudgeting
Settingrisklimits
Hedgefundriskmanagement
Riskreturnmetricsspecifictohedgefunds
Risksofspecificstrategies(fixedincomearbitrage,mergerarbitrage,convert
arbitrage,equitylong/shortmarketneutral,macro,distresseddebt,emerging
markets)
Assetilliquidity,valuation,andriskmeasurement
Theuseofleverageandderivativesandtheriskstheycreate
Measuringexposurestoriskfactors(dynamicstrategies,leverage,derivatives,style
drift)
Pensionfundriskmanagement

ReadingsforRiskManagementandInvestmentManagement

56. GrinoldandKahn,ActivePortfolioManagement:AQuantitativeApproachforProducing
SuperiorReturnsandControllingRisk,2ndEdition.
Chapter14PortfolioConstruction
Chapter17PerformanceAnalysis

57. LarsJaeger(ed),TheNewGenerationofRiskManagementforHedgeFundsandPrivate
EquityInvestments(London:EuromoneyInstitutionalInvestor,2003).
Chapter6FundsofHedgeFunds,bySohailJaffer
Chapter27StyleDrifts:Monitoring,DetectionandControl,byPierreYvesMoix

58. LarsJaeger,ThroughtheAlphaSmokeScreens:AGuidetoHedgeFundReturns(New
York:InstitutionalInvestorBooks,2005).
Chapter5IndividualHedgeFundStrategies

59. Jorion,ValueatRisk,3rdEdition.
Chapter7PortfolioRisk:AnalyticalMethods
Chapter17VaRandRiskBudgetinginInvestmentManagement

60. RenStulz,HedgeFunds:Past,PresentandFuture,Copyofarticleavailableat
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=939629.

61. RobertLittermanandtheQuantitativeResourcesGroup,ModernInvestment
Management:AnEquilibriumApproach(Hoboken,NJ:JohnWiley&Sons:2003).
Chapter17RiskMonitoringandPerformanceMeasurement

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page74of86

62. LeslieRahl(editor),RiskBudgeting:ANewApproachtoInvesting(London:RiskBooks,
2004).
Chapter6RiskBudgetingforPensionFundsandInvestmentManagersUsingVaR,by
MichelleMcCarthy

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page75of86

ReadingsforRiskManagementandInvestmentManagementAIMS

GrinoldandKahn,ActivePortfolioManagement:AQuantitativeApproachforProducing
SuperiorReturnsandControllingRisk,2ndEdition.
Chapter14PortfolioConstruction

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetheinputstotheportfolioconstructionprocess.
Discussthemotivationandmethodsforrefiningalphasintheimplementationprocess.
Describeneutralizationandmethodsforrefiningalphastobeneutral.
Discusstheimplicationstransactioncostshaveonportfolioconstruction.
Discusspracticalissuesinportfolioconstructionsuchasdeterminationofriskaversion,
incorporationofspecificriskaversion,andproperalphacoverage.
Describeportfoliorevisionsandrebalancingandthetradeoffsbetweenalpha,risk,
transactioncostsandtimehorizon.
o Discusstheoptimalnotraderegionforrebalancingwithtransactioncosts.
Describethefollowingportfolioconstructiontechniques,includingstrengthsand
weaknesses:
o Screens
o Stratification
o Linearprogramming
o Quadraticprogramming
Definedispersion,itscausesandmethodsforcontrollingformsofdispersion.

GrinoldandKahn,ActivePortfolioManagement:AQuantitativeApproachforProducing
SuperiorReturnsandControllingRisk,2ndEdition.
Chapter17PerformanceAnalysis

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describethegoalofperformanceanalysisanditsusesforinvestorsandfundmanagers.
Discussthetradeoffofskillandluckinfundmanagement,includingtheimplicationofthe
efficientmarkethypothesisforactivemanagement.
Defineandcomputethecompoundtotalreturn,geometricaveragereturn,averagelog
returnandthearithmeticaveragereturnforaportfolio.
Describecrosssectionalanalysisofperformancedataanddiscussshortcomingsofthis
approach.
Describethereturnregressionapproachtoperformanceanalysisandinterpretresulting
alphavalues.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page76of86

Describerefinementstothebasicreturnbasedperformanceassessmentmodelsincluding
Bayesiancorrection,adjustmentsforheteroskedasticityandautocorrelation,inclusionof
benchmarktimingandstyleanalysis,andcontrollingforsizeandvalue.
Describeportfoliobasedperformanceanalysis,includingtheuseofperformance
attributionandperformanceanalysis.
Define,describeandcalculateactivesystematicreturns,expectedactivebetareturns,
activebetasurprise,andactivebenchmarktimingreturn.

LarsJaeger(ed),TheNewGenerationofRiskManagementforHedgeFundsandPrivateEquity
Investments(London:EuromoneyInstitutionalInvestor,2003).
Chapter6FundsofHedgeFunds,bySohailJaffer

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Explainthegeneralstructure,objectives,andcharacteristicsoffundsofhedgefunds.
Explainhowfundsofhedgefundscanbeclassifiedaccordingtostyle,strategy,asset
allocationanddiversificationcharacteristics.
Discussconsiderationsforstrategyallocationinafundofhedgefunds.
Discussconsiderationsintheduediligenceprocessofselectingafundofhedgefunds
manager.
Discusstheobjectivesofhedgefundinvestorsinseekingdisclosurefromfundofhedge
fundmanagersandtheIRCrecommendedalternativetofullpositiondisclosure.
Discussriskmanagement,transparency,andliquidityconsiderationsforafundofhedge
fundsmanager.

LarsJaeger(ed),TheNewGenerationofRiskManagementforHedgeFundsandPrivateEquity
Investments(London:EuromoneyInstitutionalInvestor,2003).
Chapter27StyleDrifts:Monitoring,DetectionandControl,byPierreYvesMoix

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetheconceptsofinvestmentstyleandstrategywithinhedgefundinvesting.
Discussthedifferencesininvestmentstyleassessmentofhedgefundsandtraditionallong
onlyinvestmentfunds.
Definetheconceptofstyledriftasitpertainstohedgefunds.
Discusstheimportanceofdetecting,monitoring,andcontrolofstyleandstrategydriftsfor
hedgefundinvestors.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page77of86

Discussreasonshedgefundmanagersmaydriftfromtheirstyles.
Discussapproachesformonitoring,detectionandcontrolofstyledrift.

LarsJaeger,ThroughtheAlphaSmokeScreens:AGuidetoHedgeFundReturns(NewYork:
InstitutionalInvestorBooks,2005).
Chapter5IndividualHedgeFundStrategies

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describetheunderlyingcharacteristics,sourcesofreturnsandriskexposuresofvarious
hedgefundstrategiesincluding
o Equitylong/short
o Marketneutral
o Statisticalarbitrage
o Markettiming
o Shortselling
o Distressedsecurities
o Fixedincomearbitrage
o Capitalstructurearbitrage
o Eventdrivenandmergerarbitrage
o Globalmacro
o RegulationD
o Commoditytradingadviser
o Relativevalue
o Volatilityarbitrage
Describethereasonsbehindmarketinefficienciesandwaystoexploittheseinefficiencies.
Explaintheimportanceofindividualfundmanagersskillinperformanceofhedgefunds.

PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rdEdition
(NewYork:McGrawHill,2007).
Chapter7PortfolioRisk:AnalyticalMethods

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DefineanddistinguishbetweenindividualVaR,incrementalVaRanddiversifiedportfolio
VaR.
Discusstherolecorrelationhasonportfoliorisk.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page78of86

ComputediversifiedVaR,individualVaR,andundiversifiedVaRofaportfolio.
Define,compute,andexplaintheusesofmarginalVaR,incrementalVaR,andcomponent
VaR.
DescribethechallengesassociatedwithVaRmeasurementasportfoliosizeincreases.
DemonstratehowonecanusemarginalVaRtoguidedecisionsaboutportfolioVaR.
Explainthedifferencebetweenriskmanagementandportfoliomanagement,and
demonstratehowtousemarginalVaRinportfoliomanagement.

PhilippeJorion,ValueatRisk:TheNewBenchmarkforManagingFinancialRisk,3rdEdition
(NewYork:McGrawHill,2007).
Chapter17VaRandRiskBudgetinginInvestmentManagement

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Defineriskbudgeting.
Discusstheimpacthorizon,turnoverandleveragehaveontheriskmanagementprocessin
theinvestmentmanagementindustry.
Describetheinvestmentprocessoflargeinvestorssuchaspensionfunds.
Describetheriskmanagementchallengeswithhedgefunds.
Defineanddescribethefollowingtypesofrisk
o Absoluterisk
o Relativerisk
o Policymixrisk
o Activemanagementrisk
o Fundingrisk
o Sponsorrisk
DescribehowVaRcanbeusedtocheckcompliance,monitorriskbudgetsandreverse
engineersourcesofrisk.
ExplainhowVaRcanbeusedintheinvestmentprocessanddevelopmentofinvestment
guidelines.
Describetheriskbudgetingprocessacrossassetclassesandactivemanagers.
o Definetrackingerrorandinformationratio.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page79of86

RenStulz,HedgeFunds:Past,PresentandFuture,Copyofarticleavailableat
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=939629.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Compareandcontrasthedgefundsandmutualfunds.
Analyzetheimplicationstheincentivestructureofhedgefundshasontheriskand
performanceofthefunds.
Discusstheimplicationsofahighwatermark,investmentredemptionrestrictionsand
disclosurerequirementsforhedgefunds.
Describehowhedgefundsexploitarbitrageopportunitiesandcanbemoreeffectivethan
mutualfundsatmakingmarketsefficient.
Describeanddistinguishbetweenvarioushedgefundstrategies,including:
o Long/shortequityhedgefunds
o Eventdrivenhedgefunds
o Macrohedgefunds
o Fixedincomearbitragehedgefunds
Discussdifficultieswithevaluatinghedgefundperformanceandrisk,includingsampling
biasandvaluation.
Summarizeempiricalresearchonhedgefundperformance.
Discussthefollowingrisksthatconcernregulatorswithrespecttohedgefunds:
o Investorprotection
o Riskstofinancialinstitutions
o Liquidityrisk
o Excessvolatilityrisk
Describehowthefutureofhedgefundscouldbeimpactedbycompetition,increased
institutionalinvestmentsandregulation.

RobertLittermanandtheQuantitativeResourcesGroup,ModernInvestmentManagement:An
EquilibriumApproach(Hoboken,NJ:JohnWiley&Sons:2003).
Chapter17RiskMonitoringandPerformanceMeasurement

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Define,compareandcontrastVaRandtrackingerrorasriskmeasures.
Describeriskplanningincludingobjectivesandparticipantsinitsdevelopment.
Describeriskbudgetingandtheroleofquantitativemethods.
Describeriskmonitoringanditsroleinaninternalcontrolenvironment.
Discusssourcesofriskconsciousnesswithinanorganization.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page80of86

Discusstheobjectivesofariskmanagementunitinaninvestmentmanagementfirm.
Describehowriskmonitoringconfirmsthatinvestmentactivitiesareconsistentwith
expectations.
Discusstheimportanceofliquidityconsiderationsforaportfolio.
Explaintheobjectivesofperformancemeasurement.
Describecommonfeaturesofaperformancemeasurementframeworkincluding:
o Comparisonofperformancewithexpectations
o Returnattribution
o MetricssuchasSharpeandinformationratios
o Comparisonswithbenchmarkportfoliosandpeergroups.

LeslieRahl(editor),RiskBudgeting:ANewApproachtoInvesting(London:RiskBooks,2004).
Chapter6RiskBudgetingforPensionFundsandInvestmentManagersUsingVaR,by
MichelleMcCarthy

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DiscusshowVaRdiffersfromtraditionalportfolioriskmeasures.
IdentifyanddiscusscommonmisconceptionsaboutVaR.
Discusskeymarketrisksforpensionfundsandassetmanagementfirms.
Defineriskbudgetingandidentifycomponentsinaninvestmentprocesswhichmaybe
subjecttoariskbudget.
Discussrisktolerancethresholdsanddescribecommonwayssuchthresholdsare
determined.
Identifyanddiscussfactorsthatdifferentiateriskbudgetingfromassetallocation.
IdentifypracticesthatcandecreasethevalidityofaVaRmeasureanddiscuss
considerationsformaintainingaqualityVaRmeasure.
Identifypotentialactionstotakeifrisktolerancethresholdsareexceeded.
Compareandcontrastriskbudgetingwithtraditionalmeansofmeasuringandcontrolling
riskincluding:(i)assetallocation,(ii)investmentguidelines,(iii)standarddeviation,(iv)
beta,and(v)duration.
ExplainhowbacktestingcanbeusedtocalibrateaVaRmodel.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

CurrentIssuesinFinancialMarkets

Page81of86

LevelIIExamWeight:20%,FullExamWeight:10%

Causesandconsequencesofthecurrentcrisis
Subprimemortgagedesign
Mortgagesandsecuritization,subprimeCDOs
Liquiditycrises
UseandlimitationsofVaR
Hedgefundsandsystemicrisk

ReadingsforCurrentIssuesinFinancialMarkets

63. GaryGorton,Information,Liquidity,andthe(Ongoing)Panicof2007,(January2009).
AvailableatSSRN:http://ssrn.com/abstract=1324195

64. RaghuramRajan,HasFinancialDevelopmentMadeTheWorldRiskier?(September
2005).Availableathttp://faculty.chicagobooth.edu/raghuram.rajan/research/finrisk.pdf.

65. FSA,FSAmovestoenhancesupervisioninwakeofNorthernRock:Executive
Summary.Availableathttp://www.fsa.gov.uk/pubs/other/exec_summary.pdf.

66. SeniorSupervisoryGroup,ObservationsonRiskManagementPracticesduringthe
RecentMarketTurbulence,(March2008).Availableat:
www.newyorkfed.org/newsevents/news/banking/2008/ssg_risk_mgt_doc_final.pdf.

67. JohnMartin,APrimerontheRoleofSecuritizationintheCreditMarketCrisisof
2007,(January2009).AvailableatSSRN:http://ssrn.com/abstract=1324349.

68. UBS,ShareholderReportonUBSsWriteDowns,(April2008).Availableat:
www.ubs.com/1/ShowMedia/investors/shareholderreport?contentId=140333&name=08041
8ShareholderReport.pdf.

69. AndrewG.Haldane,WhyBanksFailedtheStressTest,(February2009).Availableat:
www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf.

70. AndrewLo,HedgeFunds,SystemicRisk,andtheFinancialCrisisof20072008:Written
TestimonyfortheHouseOversightCommitteeHearingonHedgeFunds,(November
2008).AvailableatSSRN:http://ssrn.com/abstract=1301217.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page82of86

ReadingsforCurrentIssuesinFinancialMarketsAIMS

GaryGorton,Information,Liquidity,andthe(Ongoing)Panicof2007,(January2009).
AvailableatSSRN:http://ssrn.com/abstract=1324195

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescribetheABXIndexanditscomposition.
DescribethemotivationsofprotectionbuyersandsellersinanABXindexcontractandthe
exchangeofpayments.
DiscusstheroleABXindicesplayedinthecurrentcrisis.
DiscusstherelationshipbetweentherepomarketandtheABXindicesandhowa
breakdownintherelationshipinthesetwomarketscanleadtoaliquiditycrisis.
Describetheeffectanincreaseinrepomarkethaircutshasonahighlyleveragedfirm.

RaghuramRajan,HasFinancialDevelopmentMadeTheWorldRiskier?(September2005).
Availableathttp://faculty.chicagobooth.edu/raghuram.rajan/research/finrisk.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Listkeydriversofchangeinthefinanciallandscapeoverthepastthirtyyearsanddescribe
theirimpact.
Describewaysinwhichincentivestructuresforinvestmentmanagerstodaydifferfrom
thoseofbankmanagersofthepastandthetypesofperversebehaviortheycaninduce.
Describetheimpacttechnologyhashadonbanklending,regulation,andcompetition.
Explainhowbankscapitalstructuremayexplainbanksorganizationalform.
Discusshowtherisktransferandriskwarehousingfunctionofbankshasimpactedthe
overallriskinessofthebankingsystem.
Explainthelinkbetweenmarketintegrationandthedemandsonmarketsuperstructures.
Explainthefollowingtopicsastheyrelatetoinvestmentmanagerbehaviorpatterns:
o Hiddentailrisk
o Herding
o Lowinterestrates
Describehowmodernbankbehaviormayimpactmarketliquidityinadownturn.
Differentiatebetweenmicroprudentialandmacroprudentialreasonsforsupervisionand
describesomeoftheinstrumentsofprudentialsupervision.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page83of86

FSA,FSAmovestoenhancesupervisioninwakeofNorthernRock:ExecutiveSummary.
Availableathttp://www.fsa.gov.uk/pubs/other/exec_summary.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DescriberisksthattheFSAmayhaveoverlookedrelatedtoNorthernRocksrapid
expansion.
DescribeFSAsassumptionsaboutNorthernRocksaccesstoliquiditythatmayhavebeen
flawed.
DescribedepositorresponsetoNorthernRocksdifficulties.
DescribepersonnelissuesatFSAthatmayhaveledtoshortcomingsinsupervision.

SeniorSupervisoryGroup,ObservationsonRiskManagementPracticesduringtheRecent
MarketTurbulence,(March2008).Availableat:
www.newyorkfed.org/newsevents/news/banking/2008/ssg_risk_mgt_doc_final.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describeareasofriskmanagementpracticesthatdifferentiatedfirmperformanceduring
therecentmarketcrisis.
Describeandgiveexamplesofwaysinwhichtheactionsofseniormanagement
differentiatedfirmperformanceduringtherecentmarketcrisis.
Describeandgiveexamplesofwaysinwhichthemanagementofliquidity,credit,and
marketriskdifferentiatedfirmperformanceduringtherecentmarketcrisis.
DiscussproblemsandshortcomingsfirmsencounteredintheiruseofVaRandstresstests.

JohnMartin,APrimerontheRoleofSecuritizationintheCreditMarketCrisisof2007,
(January2009).AvailableatSSRN:http://ssrn.com/abstract=1324349.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Discusstheargumentthatthetraditionaloriginatetoholdmodelofcreditmarketstothe
originatetodistributemodelwasaprimarydriverofthecurrentcrisis.
Describeandidentifythebasicsofthesecuritizationprocessandtheroleeachparticipant.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page84of86

Explainthepotentialbenefitsandproblemstooriginatingfirmsthatcanbederivedfrom
securitization.
Discussthemotivationforinvestinginmortgagebackedsecurities.
Definewarehousingandresidualinterestrisk.
Discusstheevidencethatcreditstandardsformortgagesdeclinedintheearly2000s.
Explainhowthecomplexityofmultilayersecuritizationleadstolossofinformation
Explaintheeffectoffallingresidentialrealestatepricesonmortgagebackedsecurity
portfolios.
DiscusshowmarktomarketaccountingofMBSsimpactedfirms.

UBS,ShareholderReportonUBSsWriteDowns,(April2008).Availableat:
www.ubs.com/1/ShowMedia/investors/shareholderreport?contentId=140333&name=080418Shareh
olderReport.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

DiscussfactorsthatcontributedtoUBSholdingmoreCDOrelatedriskovertime,including
hedgingandpositionlimitdecisions.
Discusstheimpactgrowthandrevenuepressureshadoninternaldecisionmaking
processesatUBS.
DescribetheprimarymarketriskmonitoringmetricsusedbyUBSanddiscussriskcontrol
mechanismsthatUBSdidnothaveinplace.
DescribeshortcomingsofthedatausedbyUBSforCDOvolatilitymodeling,theproblems
causedbyafailuretolookthroughtheCDOstructuretotheunderlyingassets,andother
deficienciesinUBSsriskmeasuringandmonitoringtools.
DescribeshortcomingsinUBSsriskreportingframeworkincludingtheimpactofhedging
assumptionsonVaRcalculations.
DiscussmismatchesinUBSsfunding/liabilityframework.
DiscussproblemsthatderivedfromUBSsrelianceonexternalratings.
DescribeproblemsrelatedtoUBSstradeapprovalprocessandtheorganizational
relationshipbetweenstructuringandtradinggroups.
Describecompensationstructureissuesthatcontributedtoexcessiveorpoorlycontrolled
risktakingatUBS.

2009byGlobalAssociationofRiskProfessionals,Inc.


AIMStatements,FRM2009

Page85of86

AndrewG.Haldane,WhyBanksFailedtheStressTest,(February2009).Availableat:
www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Discusshowflawsinriskmanagementmodelscancausefinancialcrises.
Describethefollowingeconomicfrictionsanddiscusstheriskmanagementimplicationsof
each:
o Disastermyopia
o Networkexternalities
o Misalignedincentives
Explainhowriskmodelshavecontributedtothecurrentcrisis.
Discussmethodsforimprovingstresstestingamongfinancialinstitutions

AndrewLo,HedgeFunds,SystemicRisk,andtheFinancialCrisisof20072008:Written
TestimonyfortheHouseOversightCommitteeHearingonHedgeFunds,(November2008).
AvailableatSSRN:http://ssrn.com/abstract=1301217.

AIMSAftercompletingthisreading,candidatesshouldbeableto:

Describesystemicrisk,anddiscusstheroleofleverage,liquidity,correlation,
concentration,sensitivitiesandconnectedness.
Discusstheincreaseinabsolutecorrelationsamonghedgefundstrategiesinrecentyears
anditsimplications.
Explainsomeofthebeneficialroleshedgefundsplayintheglobalfinancialsystem.
Describethebehavioralaspectsthatareatthefoundationsofsystemicrisk.
Discusstheimportanceoftransparencyformanagingsystemicrisk.
Explainhowtheincreasedcomplexityoffinancialmarketshasmagnifiedtheimportanceof
financialeducationandexpertise.

2009byGlobalAssociationofRiskProfessionals,Inc.