Part II

The FRM® part II exam is split into five major topic areas. The topics were selected by the FRM Committee as topics that risk managers who work in practice today have to master. These five topics, with their weight on the FRM exam, are listed below.

Market Risk Measurement and Management

• Volatility smiles and volatility term structures
• Exotic options
• Duration and convexity of fixed income securities
• Term structure models
• Backtesting VaR
• Mapping financial instruments to risk factors
• Expected shortfall and coherent risk measures
• Extreme value theory
• Copulas and tail dependence
• Mortgages and mortgage‐backed securities
  • Underwriting mortgages
  • Prepayment models
  • Risks in mortgages and mortgage‐backed securities
  • Valuation of mortgage‐backed securities
     

Credit Risk Measurement and Management

• Subprime mortgages and subprime securitization
• Counterparty risk and OTC derivatives
• Credit derivatives, credit default swaps and credit‐linked notes
• Structured finance, securitization, tranching and subordination
• Collateralized Debt Obligations (pricing and risk management)
• Probability of default, loss given default and recovery rates
• Credit scoring
• Credit spreads
• Expected and unexpected loss
• Contingent claim approach and the KMV Model
• Default and default‐time correlations
• Portfolio credit risk
• Credit risk management models
• Risk mitigation techniques (including netting, rating triggers, and collateral)
   

Operational and Integrated Risk Measurement

• Definition of risk capital
• Allocation of risk capital across the firm
• Firm‐wide risk measurement and management
• Correlations across market, credit, and operational risk
• Evaluating the performance of risk management systems
• Regulation and the Basel II Accord
• Minimum capital requirements
• Credit concentration risk
• Liquidity risk
• Stress testing
• Implementation and model risk
• Liquidity risk
• Economic capital and risk aggregation
   

Risk Management & Investment Management

• Portfolio construction
• Risk decomposition and performance attribution
• Risk budgeting
• Setting risk limits
• Hedge fund risk management
• Risk‐return metrics specific to hedge funds
• Risks of specific strategies (fixed‐income arbitrage, merger arbitrage, convert arbitrage, equity long/short‐market neutral, macro, distressed debt, emerging markets)
• Asset illiquidity, valuation, and risk measurement
• The use of leverage and derivatives and the risks they create
• Measuring exposures to risk factors (dynamic strategies, leverage, derivatives, style drift)
• Pension fund risk management
   

Current Issues in the Financial Markets

• Causes and consequences of the current crisis
• Subprime mortgage design
• Mortgages and securitization, subprime CDOs
• Liquidity crises
• Use and limitations of VaR
• Hedge funds and systemic risk