FRM Part II study guide
Every chapter of all four papers, broken into 622 topics. Each topic shows the concept, a step-by-step way to solve questions, the quickest method for the exam, the mistakes students make and worked examples.
Paper 1: FRM Exam Part II
Objective, MCQ · 107 chaptersEstimating Market Risk Measures: An Introduction and Overview
- Value at Risk (VaR) Basics and Parameters
- Historical Simulation VaR
- Parametric VaR: Normal and Lognormal
- Expected Shortfall and Coherent Risk Measures
- Spectral Risk Measures and Risk-Aversion Weights
- Estimating Standard Errors and Confidence Intervals for Risk Measures
- QQ Plots and Assessing Distributional Fit
Validating Bank Holding Companies' Value-at-Risk Models for Market Risk
- VaR Model Validation Framework and Objectives
- Backtesting VaR Models and Exception Counting
- Statistical Tests of VaR Accuracy and Independence
- Data Inputs, Risk Factor Mapping and Model Assumptions
- Benchmarking, Stress Testing and Sensitivity Analysis
- Limitations of VaR Validation and Supervisory Findings
Empirical Properties of Correlation: How Do Correlations Behave in the Real World?
- Correlation Basics and Why Correlations Matter
- Correlation Behavior in Equities: Mean Reversion
- Correlation and Market Conditions: Volatility and Economic States
- Correlation Behavior in Other Asset Classes
- Correlation Distributions, Skewness and Persistence
- Implications for Risk Models and Correlation Breakdown
The Art of Term Structure Models: Volatility and Distribution
- Interest Rate Volatility and Term Structure Basics
- Normal Model with Constant Volatility (Model 1)
- Ho-Lee Model with Time-Dependent Drift
- Vasicek Model and Mean Reversion
- Time-Dependent Volatility: Models 3 and Hull-White
- Cox-Ingersoll-Ross (CIR) Model and Rate-Dependent Volatility
- Lognormal Models: Black-Karasinski and Salomon Brothers
- Volatility Term Structure and Rate Distribution Comparison
Volatility Smiles and Volatility Surfaces
- Implied Volatility and Black-Scholes Pricing Assumptions
- Volatility Smiles for Foreign Currency Options
- Volatility Skew for Equity and Index Options
- Alternative Ways to Characterize the Volatility Smile
- The Volatility Term Structure and Volatility Surfaces
- Greek Letters and the Volatility Smile
- Models for Smiles: Jumps, Stochastic Volatility and Alternatives
- Determining Implied Distributions and Detecting Mispricing
Fundamentals of Credit Risk
- Credit Risk Components: PD, LGD, EAD and Expected Loss
- Expected vs Unexpected Loss and Credit VaR
- Credit Ratings and Transition Matrices
- Structural and Reduced-Form Credit Models
- Credit Spreads and Risk-Neutral vs Real-World Default Probabilities
- Credit Risk Mitigation: Collateral, Netting and Guarantees
Credit Risk Management
- Credit Risk Fundamentals and Credit Analysis
- Credit Ratings and Rating Transition Matrices
- Structural and Reduced-Form Credit Models
- Credit Portfolio Risk and Concentration
- Counterparty Credit Risk and Exposure Measures
- Credit Risk Mitigation: Collateral, Guarantees and Covenants
- Credit Derivatives and Securitization
- Credit Risk Governance, Regulation and Capital
Estimating Default Probabilities
- Credit Ratings and Historical Default Rates
- Rating Transition Matrices
- Default Probabilities from Bond Yields and Credit Spreads
- Default Probabilities from CDS Spreads and Asset Swaps
- Real-World vs Risk-Neutral Default Probabilities
- Merton Model and Equity-Based Default Estimation
- Credit Scoring and Altman Z-Score
- Recovery Rates and Their Link to Default
Credit Value at Risk
- Credit VaR Fundamentals and Loss Distribution
- Credit Risk Parameters: PD, LGD and EAD
- Portfolio Credit Risk and Default Correlation
- Structural Models: Merton and KMV
- CreditMetrics Approach
- CreditRisk+ and Actuarial Models
- Single-Factor Model and Vasicek Credit VaR
- Model Comparison, Validation and Limitations
Portfolio Credit Risk
- Credit Portfolio Risk and Diversification
- Expected Loss, Unexpected Loss and Economic Capital
- Default Correlation and Copula Models
- Structural Models: Merton and KMV
- Vasicek Single-Factor Model and Large Homogeneous Portfolios
- Industry Credit Portfolio Models
- Credit Risk Mitigation and Portfolio Management
An Introduction to Securitisation
- Securitisation Basics and the Originate-to-Distribute Model
- Securitisation Structure and Key Participants
- Tranching, Subordination and Credit Enhancement
- Types of Securitised Products: ABS, MBS, CDO and CLO
- Synthetic Securitisation and Credit Derivatives
- Risks, Ratings and Lessons from the Subprime Crisis
- Regulation and Capital Treatment of Securitisation
High-level Summary of Basel III Reforms
- Basel III Reforms: Objectives and Overview
- Revised Standardised Approach for Credit Risk
- Internal Ratings-Based Approach Changes and Output Floor
- Operational Risk: Standardised Approach (SMA)
- Credit Valuation Adjustment (CVA) Risk Framework
- Leverage Ratio Revisions and G-SIB Buffer
- Implementation Timeline and Transitional Arrangements
Basel III: Finalising Post-crisis Reforms
- Basel III Finalisation Overview and Objectives
- Revised Standardised Approach for Credit Risk
- Revised Internal Ratings-Based Approach and Input Floors
- Standardised Approach for Operational Risk (SMA)
- Operational Risk Loss Data and Governance Requirements
- Credit Valuation Adjustment (CVA) Risk Framework
- Output Floor and Leverage Ratio Revisions
Liquidity Stress Testing
- Liquidity Risk Fundamentals and Stress Testing Objectives
- Designing Liquidity Stress Test Scenarios
- Cash Flow Projection and Behavioral Assumptions
- Liquidity Buffers, Counterbalancing Capacity and Survival Horizon
- Regulatory Frameworks: LCR, NSFR and Supervisory Stress Tests
- Governance, Reverse Stress Testing and Use of Results
Contingency Funding Planning
- Contingency Funding Plan (CFP) Basics and Objectives
- Liquidity Stress Events and Early Warning Indicators
- Stress Testing and Scenario Analysis for Liquidity
- Contingent Funding Sources and Liquidity Buffers
- Governance, Roles and Crisis Management Procedures
- Lessons from Liquidity Crises and Regulatory Guidance
Managing Nondeposit Liabilities
- Nondeposit Liabilities and Wholesale Funding Basics
- Federal Funds and Repurchase Agreements
- Commercial Paper, Eurodollars and Other Market Funding
- Secured Funding: FHLB Advances and Central Bank Facilities
- Long-Term Debt, Brokered and Large Time Deposits
- Managing Funding Concentration, Cost and Liquidity Risk
Portfolio Construction
- Portfolio Construction Basics and Mean-Variance Optimization
- Portfolio Constraints and Practical Implementation Issues
- Black-Litterman Model and Bayesian Approaches
- Risk Budgeting and Risk Parity
- Active Portfolio Management: Alpha, Information Ratio and Fundamental Law
- Factor-Based Portfolio Construction and Smart Beta
Hedge Fund Investment Strategies
- Hedge Fund Industry Structure and Fee Models
- Long/Short Equity and Equity Market Neutral Strategies
- Event-Driven Strategies: Merger Arbitrage and Distressed Debt
- Relative Value Strategies: Fixed Income and Convertible Arbitrage
- Global Macro, Managed Futures and CTA Strategies
- Hedge Fund Performance, Biases and Factor Models
- Fund of Funds, Due Diligence and Hedge Fund Risks
Private Markets Investing
- Private Equity Fund Structure and Fees
- Private Equity Strategies: Venture Capital and Buyouts
- Private Equity Performance Measurement (IRR, TVPI, PME)
- Private Equity Risks, Liquidity and Cash Flow Modeling
- Private Credit and Direct Lending
- Real Assets: Real Estate and Infrastructure Investing
- Due Diligence, Valuation and Governance of Private Funds
Tokenization and Financial Market Inefficiencies
- Tokenization and Distributed Ledger Basics
- Frictions in Traditional Financial Markets
- Benefits of Tokenization: Atomic Settlement and Programmability
- Tokenized Money: Stablecoins, CBDCs and Deposit Tokens
- Risks and Challenges of Tokenization
- Regulation, Market Structure and Financial Stability Implications
Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector
- Digital Transformation and Financial Stability Risks
- Operational and Cyber Risk as Systemic Threats
- Third-Party and Concentration Risk (Cloud and ICT Providers)
- Digital Resilience Frameworks and Regulation
- Macroprudential Policy Tools for Digital Risks
- Information Sharing, Crisis Coordination and Insurance