P2 2010 Thru 2017 AIM Comparison - v1

2010 AIMS 2011 Reading #
Market Risk Measurement and Management
John Hull, Options, Futures, and Other Derivatives, 7th Edition (NY: Pearson, 2009 30.1
Chapter 18 - Volatility Smiles
Define volatility smile and volatility skew.
Explain how put-call parity indicates that the implied volatility used to price call options is the sam
Relate the shape of the volatility smile (or skew) to the shape of the implied distribution of the und
Explain why foreign exchange rates are not necessarily lognormally distributed and the implications
Discuss the volatility smile for equity options and give possible explanations for its shape.
Describe alternative ways of characterizing the volatility smile.
Describe volatility term structures and volatility surfaces and how they may be used to price option
Explain the impact of the volatility smile on the calculation of the Greeks.
Explain the impact of asset price jumps on volatility smiles.
John Hull, Options, Futures, and Other Derivatives, 7th Edition (NY: Pearson, 2009).
Chapter 24 - Exotic Options 30.2
Define and contrast exotic derivatives and plain vanilla derivatives.
Describe some of the factors that drive the development of exotic products.
Explain how any derivative can be converted into a zero-cost product.
List and describe how various option characteristics can transform standard American options int
List and describe the characteristics and pay-off structure of:
o Forward start options
o Compound options
o Chooser and barrier options
o Binary options
o Lookback options
o Shout options
o Asian options
o Exchange options
o Rainbow options
o Basket options
Describe and contrast volatility and variance swaps.
Explain the basic premise of static option replication and how it can be applied to hedging exotic o
Bruce Tuckman, Fixed Income Securities, 2nd Edition (Hoboken, NJ: Wiley & Sons, 31.1
Chapter 6 - Measures of Price Sensitivity Based on Parallel Yield Shifts
Describe advantages, disadvantages, and limitations of the use of price sensitivities based on paralle
Define and calculate yield-based DV01, modified duration, and Macaulay duration.
Calculate and describe the Macaulay duration of zero-coupon bonds, par bonds, and perpetuities.
Explain how coupon rate, maturity, and yield impact the duration and DV01 of a fixed income securi
Define DV01 in terms of Macaulay duration and use this definition to explain and differentiate betw
Define yield-based convexity and explain how yield-based convexity changes for changes in maturi
Explain the difference between a barbell and a bullet portfolio and analyze the impact convexity m
Bruce Tuckman, Fixed Income Securities, 2nd Edition (Hoboken, NJ: Wiley & Sons, 2002).
Chapter 7 - Key Rate and Bucket Exposures 31.2
Describe and analyze the major weakness attributable to single-factor approaches when hedging por
Describe key-rate shift analysis.
Define, calculate, and interpret key rate 01 and key rate duration.
Describe the key rate exposure technique in multifactor hedging applications and discuss its adva
Calculate the key rate exposures for a given security, and compute the appropriate hedging position
Discuss some of the considerations in choosing key rates.
Discuss why hedges based on key rates only approximate an immunized position in the underlying
Describe the relationship between key rate and bucket exposures.
Explain the main differences between the key rate shift and the bucket shift approach to manage int
Explain how key rate and bucket analysis may be applied in estimating portfolio volatility.
Chapter 9 - The Science of Term Structure Models 31.3
Using replicating portfolios develop and use an arbitrage argument to price a call option on a zero-
o Explain why the option cannot be properly priced using expected discounted values.
o Explain the role of up-state and down-state probabilities in the option valuation.
Define risk-neutral pricing and explain how it is used in option pricing.
Relate the difference between true and risk-neutral probabilities to interest rate drift.
Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be ext
Describe the rationale behind the use of non-recombining trees in option pricing.
Calculate the value of a constant maturity Treasure swap, given an interest rate tree and the risk-neu
Discuss the advantages and disadvantages of reducing the size of the time steps on the pricing of d
Explain why the Black-Scholes-Merton model to value equity derivatives is not appropriate to value
Describe the impact of embedded options on the value of fixed-income securities.
Chapter 21 - Mortgage-Backed Securities 31.4
With respect to mortgage-backed securities, define: mortgage, primary market, secondary market
Calculate interest and principal payments for a level payment mortgage.
Define a homeowners prepayment option and relate it to a bonds call option.
Describe the impact of interest rate changes on the value of the prepayment option and discuss n
Define and describe in the context of mortgages: current coupon rate, due on sale, lock-in effect, p
Describe reasons why actual mortgage prepayments behavior may be sub-optimal from a financial
Discuss the main features as well as the advantages and disadvantages of using static cash flow,
Describe the major components of prepayment models and how each variable impacts prepaymen
Explain path dependence and path independence as it relates to the valuation of mortgage-backed
Describe how Monte-Carlo simulation can be used to address issues of path dependence.
Discuss the advantages and disadvantages of Monte-Carlo simulation for valuing options.
Discuss the calculation of OAS (option-adjusted-spread) when using Monte-Carlo simulations for
Compare the impact of interest rate changes on a non-repayable mortgage and a mortgage pass-th
Describe the major features of CMOs (collateralized mortgage obligations), PAC (planned amortizatio
Discuss the impact of interest rates and prepayments on different portions of CMOs, IO and PO stri
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition
(New York: McGraw-Hill, 2007). 32.1
Chapter 6 - Backtesting VaR
Define backtesting and exceptions and explain the importance of backtesting VaR models.
Explain the significant difficulties in backtesting a VaR model.
Explain the framework of backtesting models with the use of exceptions or failure rates.
Define and identify type I and type II errors.
Explain why it is necessary to consider conditional coverage in the backtesting framework.
Describe the Basel rules for backtesting.
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition
(New York: McGraw-Hill, 2007).
Chapter 11 - VaR Mapping 32.2
Explain the principles underlying VaR Mapping, list and describe the mapping process.
Explain how the mapping process captures general and specific risks.
List and describe the three methods of mapping portfolios of fixed income securities.
Map a fixed-income portfolio into positions of standard instruments.
Discuss how mapping of risk factors can support stress testing.
Explain how VaR can be used as a performance benchmark.
Describe the method of mapping forwards, commodity forwards, forward rate agreements, and int
Describe the method of mapping options.
Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: Wiley, 20 33.1
Chapter 3 - Estimating Market Risk Measures
Estimate VaR using a historical simulation approach
Estimate VaR using a parametric estimation approach assuming that the return distribution is eith
Estimate expected shortfall given P/L or return data.
Define coherent risk measures.
Describe the method of estimating coherent risk measures by estimating quantiles.
Describe the method of estimating standard errors for estimators of coherent risk measures.
Describe the use of QQ plots for identifying the distribution of data.
Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: Wiley, 2005).
Chapter 4 - Non Parametric Approaches 33.2
Describe the bootstrap historical simulation approach to estimating coherent risk measures.
Describe historical simulation using non-parametric density estimation.
Describe the following weighted historic simulation approaches:
o Age-weighted historic simulation
o Volatility-weighted historic simulation
o Correlation-weighted historic simulation
o Filtered historical simulation
Discuss the advantages and disadvantages of non parametric estimation methods.
Chapter 5 Appendix - Modeling Dependence: Correlations and Copulas 33.3
Explain the drawbacks of using correlation to measure dependence.
Describe how copulas provide an alternative measure of dependence.
Identify basic examples of copulas.
Explain how tail dependence can be investigated using copulas.
Chapter 7 - Parametric Approaches (II): Extreme Value 33.4
Explain the importance and challenges of extreme values for risk management.
Describe extreme value theory (EVT) and its use in risk management.
Describe the peaks-over-threshold (POT) approach.
Compare generalized extreme value and POT.
Describe the parameters of a generalized Pareto (GP) distribution.
Explain the tradeoffs in setting the threshold level when applying the GP distribution.
Compute VaR and expected shortfall using the POT approach, given various parameter values.
Explain the importance of multivariate EVT for risk management.
Frank Fabozzi, Handbook of Mortgage Backed Securities, 6th edition (New York: 34.1
Chapter 1 - An Overview of Mortgages and the Mortgage Market
Define and explain the key characteristics of a mortgage contract, including:
o Lien status
o Original loan term
o Interest-rate type
o Credit guarantees
o Loan balance
o Borrower type
Describe and calculate the mortgage payment factor.
Identify graphically the effect loan term and interest rates have on loan balance over time.
Identify and explain the roles of major players in the mortgage industry.
Describe the loan underwriting process, and explain important measures of creditworthiness includ
o Credit score
o Loan-to-value ratio
o Income ratios
o Documentation
Describe the various risk associated with mortgages and mortgage backed securities and explain ri
Frank Fabozzi, Handbook of Mortgage Backed Securities, 6th edition (New York: McGraw Hill,2006)
Chapter 31 - Valuation of Mortgage-Backed Securities 34.2
Describe how static valuation of mortgage backed securities differs from dynamic valuation.
Explain the option adjusted spread (OAS) approach to valuing mortgage backed securities.
Interpret the OAS.
Define option-adjusted duration, option adjusted convexity and simulated average life.
Describe the OAS approach to value different types of CMOs and how to interpret the results relativ
Credit Risk Measurement and Management
Adam Ashcroft and Til Schuermann, Understanding the Securitization of Subpr 35

Credit, Federal Reserve Bank of New York Staff Reports, no. 318 (March 2008).
Explain the subprime mortgage credit securitization process in the United States.
List and discuss key frictions in the subprime mortgage securitization.
o Assess the relative contribution of each factor to the subprime mortgage problems.
Discuss the characteristics of the subprime mortgage market, including the creditworthiness of th
Explain the structure of the securitization process of the subprime mortgage loans.
Discuss the credit ratings process in subprime mortgage backed securities.
Discuss the implications credit ratings had on the emergence of subprime related mortgage backed
Analyze the relationship between the credit ratings cycle and the housing cycle.
Discuss the implications the subprime mortgage meltdown has on the management of portfolios.
Discuss the difference between predatory lending and borrowing.
Eduardo Canabarro and Darrell Duffie, Measuring and Marking Counterparty Risk 36
Financial Institutions, ed. Leo Tilman (London: Euromoney, 2003).
Define terms related to counterparty risk.
Identify and explain the steps of using a Monte Carlo simulation engine to model potential future
Describe how a credit valuation adjustment is made to an over-the-counter derivatives portfolio.

Define a risk-neutral mean loss rate.
Describe the procedures for computing the market value of credit risk when one or both counterpart
Darrell Duffie, Innovations in Credit Risk Transfer: Implications for Financial Stabil 37
Discuss major benefits of credit risk transfer.

Discuss the potential problems arising out of credit risk transfer.
Explain the lemons premium and moral hazard costs incurred by banks when transferring crest risk
Explain how CDS hedging and loan syndication can be near substitutes for loan sales.
Explain how fractional retention of a loan could signal commitment of the loan seller.
Explain the incentives for creation of CDOs.
Explain how default correlation across a pool of loans affects the market value of individual CDO tr
Discuss industry use of copulas to price and hedge CDOs and tranched index products
o Describe the impact of ineffective pricing and hedging of CDOs, and explain the role of ineffectiv
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital 38.1
(Hoboken, NJ: Wiley & Sons, 2006).
Chapter 12 - Credit Derivatives and Credit-Linked Notes
Describe the mechanics of a single named credit default swap (CDS), and discuss particular aspects of
Describe portfolio credit default swaps, including basket CDS, Nth to Default CDS, Senior and Su
Discuss the composition and use of iTraxx CDS indices.
Explain the mechanics of asset default swaps, equity default swaps, total return swaps and credit l
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital and Risk
Chapter 13 - The Structuring Process 38.2
Describe the objectives of structured finance and explain the motivations for asset securitization.
Describe the process and benefits of ring-fencing assets.
Discuss the role of structured finance in venture capital formation, risk transfer, agency cost reduc
Explain the steps involved and the various players in a structuring process.
Define and describe the process of tranching and subordination, and discuss the role of loss distribu
Chapter 16 - Securitization 38.3
Define securitization and describe the process and the role the participants play.
Analyze the differences in the mechanics of issuing securitized products using a trust or special pur
List and discuss the four guiding principles of FAS140 and the conditions necessary to be a qualifie
Describe how a typical Enron transaction violated FAS140 and explain the anti-Enron rule, FIN46R.
Discuss the various types of internal and external credit enhancements and interpret a simple num
Explain the impact liquidity, interest rate and currency risk has on a securitized structure, and list
Discuss the securitization process for mortgage-backed securities and asset-backed commercial pa
Chapter 17 - Cash Collateralized Debt Obligations 38.4
Define collateralized debt obligations (CDO) and discuss the motivations of CDO buyers and sellers
Discuss the types of collateral used in CDOs.
Define and explain the structure of balance sheet CDOs and arbitrage CDOs.
Describe the benefits of and motivations for balance sheet CDOs and arbitrage CDOs.
Discuss cash flow versus market value CDOs.
Discuss static versus managed portfolios of CDOs.
Arnaud de Servigny and Olivier Renault, Measuring and Managing Credit Risk (NY 39.1
Chapter 3 - Default Risk: Quantitative Methodologies
Describe the Merton model for corporate security pricing, including its assumptions, strengths and w
o Illustrate and interpret security-holder payoffs based on the Merton model.
o Using the Merton model, calculate the value of a firm's debt and equity and the volatility of firm val
o Discuss the results and practical implications of empirical studies that use the Merton model to val
Describe the Moodys KMV Credit Monitor Model to estimate probability of default using equity price
o Compare the Moodys-KMV's equity model with the Merton model.
Discuss credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibil
Define and differentiate among the following quantitative methodologies for credit analysis and scori
o Linear discriminant analysis
o Parametric discrimination
o K-nearest neighbor approach
o Support vector machines
Define and differentiate the following decision rules:
o Minimum error
o Minimum risk
o Neyman-Pearson
o Minimax
Discuss the problems and tradeoffs between classification and prediction models of performance.
Discuss the important factors in the choice of a particular class of model.
Arnaud de Servigny and Olivier Renault, Measuring and Managing Credit Risk (NY: McGraw-Hill,2004).
Chapter 4 - Loss Given Default 39.2
Define loss given default.
Identify and discuss four factors that may lead to suboptimal loan recovery rates.
Identify and discuss the impact of various features on recovery rates of traded bonds, including:
o Seniority
o Industrial sector
o Business cycle
o Collateral
o Jurisdiction
Describe the importance of modeling uncertain recovery rates.
Discuss the beta distribution approach, kernel modeling, and conditional recovery modeling to est
John Hull, Options, Futures, and Other Derivatives, 7th Edition (NY: Pearson, 2009 40.1
Chapter 22Credit Risk
Identify ratings of Moodys, Standard & Poors and Fitch that correspond to investment and non-inv
Discuss the historical relationship between default rates and recovery rates.
Estimate the probability of default for a company from its bond price.
Compare risk-neutral versus real world default probabilities.
Describe and apply Mertons approach to estimating default probabilities using equity prices.
Describe counterparty credit risk in derivatives markets and explain how it affects valuation.
Describe the following credit mitigation techniques:
o Netting
o Collateralization
o Downgrade triggers
Discuss the Gaussian copula model for time to default.
John Hull, Options, Futures, and Other Derivatives, 7th Edition (NY: Pearson, 2009).
Chapter 23Credit Derivatives 40.2
Describe a credit default swap (CDS), and explain the functions and uses of a CDS.
Compute the value of a CDS, given unconditional default probabilities, survival probabilities, marke
Discuss the potential asymmetric information problem with CDSs.
Discuss the implications of marking-to-market CDSs.
Discuss concerns with default probability and recovery rate estimates.
Identify and explain the functions and uses of
o Basket CDSs.
o Total return swaps.
Describe asset backed securities including collateralized debt obligations (CDOs) and explain
o Tranches
o Role of credit ratings
o Synthetic CDOs
o Role of correlation in valuing CDOs
Discuss the use of the Gaussian Copula Model to measure the time to default.
Linda Allen, Jacob Boudoukh and Anthony Saunders, Understanding Market, Credit 41
Chapter 4 - Extending the VaR Approach to Non-tradable Loans
Describe the following traditional approaches to measuring Credit Risk
o Expert systems
o Rating systems
o Credit scoring models
Compare structural and reduced form models for estimating default probabilities.
Describe Mertons option theoretic model to estimate default probabilities.
Explain the relationship between the yield spread and the probability of default, and calculate defau
Describe the CreditMetrics and Algorithmics proprietary VaR models for credit risk measurement.
Ren Stulz, Risk Management & Derivatives (KY: Thomson South-Western, 2002). 42
Chapter 18 - Credit Risks and Credit Derivatives
Explain the relationship of credit spreads, time to maturity, and interest rates.
Explain the differences between valuing senior and subordinated debt using a contingent claim ap
Explain, from a contingent claim perspective, the impact stochastic interest rates have on the valuat
Assess the credit risks of derivatives.
Discuss the fundamental differences between CreditRisk+, CreditMetrics and KMV credit portfolio
Define and describe a credit derivative, credit default swap, and total return swap.
Define a vulnerable option, and explain how credit risk can be incorporated in determining the opti
Discuss how to account for credit risk exposure in valuing a swap.
Michael Ong, Internal Credit Risk Models: Capital Allocation and Performance Me 43
Chapter 6 - Portfolio Effects: Risk Contributions and Unexpected Losses
Explain the relationship between expected and unexpected losses for an individual asset and a portf
Compare expected loss and unexpected loss risk measures.
Explain how the recovery rate, credit quality, and expected default frequency affect the expected
Discuss and compare different approaches to mitigate maturity effects.
Define, calculate and interpret expected and unexpected portfolio loss.
Define, calculate and interpret risk contributions within a portfolio.
Explain the different impact diversifiable and un-diversifiable risk has on portfolio expected and un
Define, calculate and interpret the effect correlation has on the expected and unexpected losses in
Studies on credit risk concentration: an overview of the issues and a synopsis of t 44

from the Research Task Force project (Basel Committee on Banking Supervision Publication,
November 2006).
Define and differentiate between systematic risk and idiosyncratic risk in the context of the Basel I
Describe how concentration risk may arise in a credit portfolio.
Describe key assumptions of the Asymptotic Single-Risk Factor (ASRF) model.
Describe how concentration risk in a credit portfolio violates the assumptions of the ASRF model an
Discuss imperfect granularity, its impact on economic capital, and proposed adjustments.
Discuss the potential impact of sectoral concentration on capital requirements within the Basel II
Describe contagion risk in the context of credit portfolios and some of the difficulties in estimating i
Describe desirable properties for stress tests of sector concentration risk, including:
o Plausibility
o Consistency
o Adaptability to the portfolio
o Adaptability to internal reporting requirements
Describe open issues related to modeling concentration risk, particularly those related to:
o The adequacy of sector schemes
o The definition of a benchmark for concentration risk correction
o Data-related issues
Operational and Integrated Risk Management
Michel Crouhy, Dan Galai and Robert Mark, Risk Management (New York: McGraw-H 45
Chapter 14 - Capital Allocation and Performance Measurement
Describe the RAROC (risk-adjusted return on capital) methodology and discuss some of the potential
Define, compare and contrast economic and regulatory capital.
Compute and interpret the RAROC for a loan or loan portfolio, and use RAROC to compare busines
Explain how capital is attributed to market, credit, and operational risk.
Calculate the capital charge for market risk and credit risk.
Explain the difficulties encountered in attributing economic capital to operational risk
Describe the Loan Equivalent Approach and use it to calculate RAROC capital
Explain how the second-generation RAROC approaches improve economic capital allocation decis
Compute the adjusted RAROC for a project to determine its viability.
See Line # 527 46
Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: Wiley, 20 47.1
Chapter 14 - Estimating Liquidity Risks
Define liquidity risk and describe factors that influence liquidity.
Discuss the bid-ask spread as a measure of liquidity.
Define exogenous and endogenous liquidity.
Describe the challenges of estimating liquidity-adjusted VaR (LVaR)
Describe and calculate LVaR using the Constant Spread approach and the Exogenous Spread appro
Discuss Endogenous Price approaches to LVaR, its motivation and limitations.
Discuss the relationship between liquidation strategies, transaction costs and market price impact.
Describe liquidity at risk (LaR) and discuss the factors that affect future cash flows.
Explain the role of liquidity in crisis situations and discuss approaches to estimating crisis liquidity r
Chapter 16 - Model Risk 47.2
Define model risk.
Identify and discuss sources of model risk, including:
o Incorrect model specification
o Incorrect model application
o Implementation risk
o Incorrect calibration
o Programming and data problems
Discuss the challenges involved with quantifying model risk.
Describe methods for estimating model risk, given an unknown component from a financial model.
Identify ways risk managers can protect against model risk.
Discuss the role of senior managers in managing model risk.
Describe procedures for vetting and reviewing a model.
Discuss the function of an independent risk oversight (IRO) unit.
Ellen Davis (editor), Operational Risk: Practical Approaches to Implementation (London: Risk
Books, 2005).
Chapter 12 - Aligning Basel II Operational Risk and Sarbanes-Oxley 404 Projects, by Nick
Bolton and Judson Berkey.
Describe the following principles for designing operational risk management framework as outlined in the Sound Practices study published by BIS in
o Board approval
o Independent internal audit
o Management implementation
o Risk identification and assessment
o Risk monitoring and reporting
o Risk control and mitigation
o Contingency and continuity planning
o Disclosure
Discuss the requirements on internal controls over financial reporting defined in Section 404 of the Sarbanes-Oxley (SOX) Act of 2002.
Discuss relationship between the SOX requirements on financial reporting and the Basel requirements on operational risk management, and how an op
Andrew Kuritzkes, Til Schuermann and Scott M. Weiner. Risk Measurement, Risk
Management and Capital Adequacy in Financial Conglomerates, in Brookings-Wharton Papers
on Financial Services Robert E. Litan and Richard Herring (eds) (Brookings Institutional Press,
Washington, DC: 2003).
Explain the silo approach to capital regulation for financial conglomerates, and discuss its limitations.
Describe the challenges a conglomerate creates for capital management.
Discuss how economic capital can serve as a common standard for assessing risk in a conglomerate.
Describe the building-block approach for aggregating risks at a financial conglomerate.
Discuss the factors that determine the diversification benefits from risk aggregation.
Discuss the diversification benefits achieved at each of the three levels of aggregation for a financial conglomerate.
Describe the hub and spoke organizational model for risk management of a financial conglomerate.
48
Brian Nocco and Ren Stulz, Enterprise Risk Management: Theory and Practice, 49
Applied Corporate Finance 18, No. 4 (2006): 8 - 20.
Define enterprise risk management (ERM).
Explain how implementing ERM practices and policies create shareholder value both at the macro a
Discuss how an ERM program can be used to determine the right amount of risk.
Discuss the development and implementation of an ERM system.
Discuss the relationship between economic value and accounting performance.
Describe the role of and issues with correlation in risk aggregation.
Distinguish between regulatory and economic capital.
Explain the use of economic capital in the corporate decision making process.
Falko Aue and Michael Kalkbrener, 2007, LDA at Work, Deutsche Bank White Paper.
Describe the Loss Distribution Approach (LDA) to quantifying operational risk.
Discuss some of the challenges with quantifying operational risk with an LDA.
Discuss the data sources that can be incorporated in a loss distribution model.
Explain the issues with the use of both internal and external loss data for modeling loss distributions.
With respect to developing an LDA, describe the key factors and challenges that must be considered in:
o Derivation of frequency and severity distributions
o Estimation of tail distributions
o Modeling correlation
o Incorporation of insurance
Discuss the validation of loss distribution approaches, including sensitivity analysis, stress testing, back testing and benchmarking.
Til Schuermann and Andrew Kuritzkes, What We Know, Dont Know and Cant Know About Bank
Risk: A View from the Trenches.
Define known risk, unknown risk and unknowable risk, and discuss the classification of market risk, credit risk, structural asset/liability risk, operational
Explain how the Basel II three pillar framework accommodates known, unknown and unknowable risks.
From the analysis provided in the paper, discuss the relative contributions of market risk, credit risk, structural asset/liability risk, operational risk and b
o Discuss the implications of the results for regulatory policy and areas for improvements in risk management.
Principles of Sound Liquidity Risk Management and Supervision (Basel Committee on Banking
Supervision Publication, September 2008).
Describe the fundamental principle for the management and supervision of liquidity risk
Describe the principles involved in the governance of liquidity risk, the measurement and management of liquidity risk and public disclosure
Describe the factors that a bank should consider in setting assumptions about scenarios.
Describe the role of supervisors in liquidity risk management.
50
51
52
Range of Practices and Issues in Economic Capital Modelling (Basel Committee on Banking
Supervision Publication, March 2009).
- Candidates, after completing this reading, should be able to:
Within the economic capital implementation framework describe the challenges that appear in:
o Defining risk measures
o Risk aggregation
o Validation of models
o Dependency modeling in credit risk
o Evaluating counterparty credit risk
o Assessing interest rate risk in the banking book
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designed for regulatory purposes.
Discuss the constraints imposed and the opportunities offered by economic capital within the following area:
o Credit portfolio management
o Risk based pricing
o Customer profitability analysis
o Management incentives.
See Line # 947 53

Readings for Basel Reference - AIMS
Basel II: International Convergence of Capital Measurement and Capital Standard 54

Framework - Comprehensive Version (Basel Committee on Banking Supervision Publication, June
2006).
Describe the key elements of the three pillars of Basel II
o Minimum capital requirements
o Supervisory review
o Market discipline
Describe the type of institutions that the Basel II Accord will be applied to
Describe the major risk categories covered by the Basel II Accord
Describe and contrast the major elements of the three options available for the calculation of credit ri
o Standardised Approach
o Foundation IRB Approach
o Advanced IRB Approach
Describe and contrast the major elements of the three options available for the calculation of operatio
o Basic Indicator Approach
o Advanced Measurement Approach
Describe and contrast the major elements - including a description of the risks covered - of the two opt
o Standardised Measurement Method
o Internal Models Approach
Define in the context of Basel II and calculate where appropriate:
o Capital ratio
o Capital charge
o Risk weights and risk-weighted assets
o Tier 1 capital and its components
o Probability of default (PD)
o Loss given default (LGD)
o Exposure at default (EAD)
o Maturity (M)
o Stress tests
o Concentration risk
o Residual risk
Supervisory guidance for assessing banks financial instrument fair value practices (Basel
Committee on Banking Supervision, April 2009).
Discuss the importance of assessment of valuation practices, particularly as it relates to complex and illiquid financial instruments.
Describe and explain the principles defined for:
o Valuation governance and control
Robustness in stressed periods
Consistency
o Risk management and reporting for valuation
Model validation
Reliability and adjustments
External reporting
Discuss the responsibilities of supervisors in evaluating valuation practices.
Guidelines for Computing Capital for Incremental Risk in the Trading Book - Final 56
(Basel Committee on Banking Supervision Publication, July 2009).
Explain the regulatory reason for incorporating the incremental default risk charge into the trading
Describe perceived shortcomings in the original VaR framework for measuring risk in the trading b
Define the risks captured by the incremental risk charge and the key supervisory parameters for c
Define the frequency banks must calculate the incremental risk charge.
Calculate the capital charge for incremental risk as a function of recent increment risk charge meas
Revisions to the Basel II market risk framework- Final Version (Basel Committee 58
Supervision Publication, July 2009).
Describe the objectives for revising the Basel II market risk framework.
Define the capital charge for specific risk and general market risk.
Explain the relationship regulators require between market risk factors used for pricing versus thos
Explain and calculate the stressed value-at-risk measure and the frequency which it must be calcul
Explain and calculate the market risk capital requirement.
Describe the qualitative disclosures for the incremental risk capital charge.
Describe the quantitative disclosures for trading portfolios under the internal models approach.
Describe the regulatory guidance on prudent valuation of illiquid positions.
59
Risk Management and Investment Management
Grinold and Kahn, Active Portfolio Management: A Quantitative Approach for Pro 60.1
Superior Returns and Controlling Risk, 2nd Edition.
Chapter 14 - Portfolio Construction
Describe the inputs to the portfolio construction process.
Discuss the motivation and methods for refining alphas in the implementation process.
Describe neutralization and methods for refining alphas to be neutral.
Discuss the implications transaction costs have on portfolio construction.
Discuss practical issues in portfolio construction such as determination of risk aversion, incorporat
Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction cos
o Discuss the optimal no-trade region for rebalancing with transaction costs.
Describe the following portfolio construction techniques, including strengths and weaknesses:
o Screens
o Stratification
o Linear programming
o Quadratic programming
Define dispersion, its causes and methods for controlling forms of dispersion.
Grinold and Kahn, Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk, 2nd Edition.
Chapter 17 - Performance Analysis 60.2
Describe the goal of performance analysis and its uses for investors and fund managers.
Discuss the tradeoff of skill and luck in fund management, including the implication of the effici
Define and compute the compound total return, geometric average return, average log return and t
Describe cross-sectional analysis of performance data and discuss shortcomings of this approach.
Describe the return regression approach to performance analysis and interpret resulting alpha valu
Describe refinements to the basic return-based performance assessment models including Bayesian c
Describe portfolio-based performance analysis, including the use of performance attribution and
Define, describe and calculate active systematic returns, expected active beta returns, active beta
Lars Jaeger (ed), The New Generation of Risk Management for Hedge Funds and Private Equity
Investments (London: Euromoney Institutional Investor, 2003).
Chapter 6 - Funds of Hedge Funds, by Sohail Jaffer
Explain the general structure, objectives, and characteristics of funds of hedge funds.
Explain how funds of hedge funds can be classified according to style, strategy, asset allocation and diversification characteristics.
Discuss considerations for strategy allocation in a fund of hedge funds.
Discuss considerations in the due diligence process of selecting a fund of hedge funds manager.
Discuss the objectives of hedge fund investors in seeking disclosure from fund of hedge fund managers and the IRC-recommended alternative to full p
Discuss risk management, transparency, and liquidity considerations for a fund of hedge funds manager.
Lars Jaeger (ed), The New Generation of Risk Management for Hedge Funds and Private Equity
Investments (London: Euromoney Institutional Investor, 2003).
Chapter 27 - Style Drifts: Monitoring, Detection and Control, by Pierre-Yves Moix
Describe the concepts of investment style and strategy within hedge fund investing.
Discuss the differences in investment style assessment of hedge funds and traditional long-only investment funds.
Define the concept of style drift as it pertains to hedge funds.
Discuss the importance of detecting, monitoring, and control of style and strategy drifts for hedge fund investors.
Discuss reasons hedge fund managers may drift from their styles.
Discuss approaches for monitoring, detection and control of style drift.
61
Lars Jaeger, Through the Alpha Smoke Screens: A Guide to Hedge Fund Returns (New York:
Institutional Investor Books, 2005).
Chapter 5 - Individual Hedge Fund Strategies
Describe the underlying characteristics, sources of returns and risk exposures of various hedge fund strategies including
o Equity long/short
o Market-neutral
o Statistical arbitrage
o Market timing
o Short-selling
o Distressed securities
o Fixed-income arbitrage
o Capital structure arbitrage
o Event-driven and merger arbitrage
o Global macro
o Regulation D
o Commodity trading adviser
o Relative value
o Volatility arbitrage
Describe the reasons behind market inefficiencies and ways to exploit these inefficiencies.
Explain the importance of individual fund managers skill in performance of hedge funds.
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3 62.1
Chapter 7 - Portfolio Risk: Analytical Methods
Define and distinguish between individual VaR, incremental VaR and diversified portfolio VaR.
Discuss the role correlation has on portfolio risk.
Compute diversified VaR, individual VaR, and undiversified VaR of a portfolio.
Define, compute, and explain the uses of marginal VaR, incremental VaR, and component VaR.
Describe the challenges associated with VaR measurement as portfolio size increases.
Demonstrate how one can use marginal VaR to guide decisions about portfolio VaR.
Explain the difference between risk management and portfolio management, and demonstrate ho
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition (New York: McGraw-Hill, 2007).
Chapter 17 - VaR and Risk Budgeting in Investment Management 62.2
Define risk budgeting.
Discuss the impact horizon, turnover and leverage have on the risk management process in the i
Describe the investment process of large investors such as pension funds.
Describe the risk management challenges with hedge funds.
Define and describe the following types of risk
o Absolute risk
o Relative risk
o Policy-mix risk
o Active management risk
o Funding risk
o Sponsor risk
Describe how VaR can be used to check compliance, monitor risk budgets and reverse engineer sour
Explain how VaR can be used in the investment process and development of investment guidelines
Describe the risk budgeting process across asset classes and active managers.
o Define tracking error and information ratio.
Ren Stulz, Hedge Funds: Past, Present and Future. Fisher College of Business Working
Paper No. 2007-03-003; Charles A Dice Center WP No. 2007-3.
Compare and contrast hedge funds and mutual funds.
Analyze the implications the incentive structure of hedge funds has on the risk and performance of the funds.
Discuss the implications of a high-water mark, investment redemption restrictions and disclosure requirements for hedge funds.
Describe how hedge funds exploit arbitrage opportunities and can be more effective than mutual funds at making markets efficient.
Describe and distinguish between various hedge fund strategies, including:
o Long/short equity hedge funds
o Event-driven hedge funds
o Macro hedge funds
o Fixed income arbitrage hedge funds
Discuss difficulties with evaluating hedge fund performance and risk, including sampling bias and valuation.
Summarize empirical research on hedge fund performance.
Discuss the following risks that concern regulators with respect to hedge funds:
o Investor protection
o Risks to financial institutions
o Liquidity risk
o Excess volatility risk
Describe how the future of hedge funds could be impacted by competition, increased institutional investments and regulation.
Robert Litterman and the Quantitative Resources Group, Modern Investment Ma 63

Equilibrium Approach (Hoboken, NJ: John Wiley & Sons: 2003).
Chapter 17Risk Monitoring and Performance Measurement
Define, compare and contrast VaR and tracking error as risk measures.
Describe risk planning including objectives and participants in its development.
Describe risk budgeting and the role of quantitative methods.
Describe risk monitoring and its role in an internal control environment.
Discuss sources of risk consciousness within an organization.
Discuss the objectives of a risk management unit in an investment management firm.
Describe how risk monitoring confirms that investment activities are consistent with expectations.
Discuss the importance of liquidity considerations for a portfolio.
Explain the objectives of performance measurement.
Describe common features of a performance measurement framework including:
o Comparison of performance with expectations
o Return attribution
o Metrics such as Sharpe and information ratios
o Comparisons with benchmark portfolios and peer groups.
Leslie Rahl (editor), Risk Budgeting: A New Approach to Investing (London: Risk Books, 2004).
Chapter 6 - Risk Budgeting for Pension Funds and Investment Managers Using VaR, by
Michelle McCarthy
Discuss how VaR differs from traditional portfolio risk measures.
Identify and discuss common misconceptions about VaR.
Discuss key market risks for pension funds and asset management firms.
Define risk budgeting and identify components in an investment process which may be subject to a risk budget.
Discuss risk tolerance thresholds and describe common ways such thresholds are determined.
Identify and discuss factors that differentiate risk budgeting from asset allocation.
Identify practices that can decrease the validity of a VaR measure and discuss considerations for maintaining a quality VaR measure.
Identify potential actions to take if risk tolerance thresholds are exceeded.
Compare and contrast risk budgeting with traditional means of measuring and controlling risk including: (i) asset allocation, (ii) investment guidelines,
Explain how backtesting can be used to calibrate a VaR model.
Matches 2010 Line # 708 64

Manmohan Singh and James Aitken, Deleveraging after LehmanEvidence from Reduced
Rehypothecation (March 2009).
Explain the term rehypothecation and explain its main advantage.
Explain the difference between the rehypothecation laws in the U.S and the U.K.
Compare the process of recovering investor assets in the U.S and the U.K due to the differences in legislation.
Explain how rehypothecation has changed after Lehmans bankruptcy.
65
Stephen Dimmock and William Gerken, Finding Bernie Madoff: Detecting Fraud 66
Investment Managers, (December 2009).
Discuss the importance of predicting fraud of investment managers.
Explain how Form ADV helps in predicting investment fraud.
Discuss whether investors are compensated for fraud risk.
Discuss whether there is predictive capability in information hidden in Form ADV.
Discuss firm death and investor outflows with respect to type of fraud disclosure.
67
68
See Line # 795 69
70
Current Issues in Financial Markets

Gary Gorton, The Panic of 2007, (August 2008). 71
Explain the evolution of the subprime mortgage market.
List differences between prime and subprime mortgages and borrowers.

Describe the design of Subprime Residential Mortgage Backed Securities (RMBS).
Explain the role of CDOs in subprime securitization.
Explain how the ABX information together with the lack of information about the location of risks l
Raghuram Rajan, Has Financial Development Made The World Riskier? (Septem 72
List key drivers of change in the financial landscape over the past thirty years and describe their im
Describe ways in which incentive structures for investment managers today differ from those of b
Describe the impact technology has had on bank lending, regulation, and competition.
Explain how banks capital structure may explain banks organizational form.
Discuss how the risk-transfer and risk-warehousing function of banks has impacted the overall risk
Explain the link between market integration and the demands on market superstructures.
Explain the following topics as they relate to investment manager behavior patterns:
o Hidden tail risk
o Herding
o Low interest rates
Describe how modern bank behavior may impact market liquidity in a downturn.
Differentiate between micro-prudential and macro-prudential reasons for supervision and describe
Senior Supervisory Group, Observations on Risk Management Practices during the Recent
Market Turbulence, (March 2008).
Describe areas of risk management practices that differentiated firm performance during the recent market crisis.
Describe and give examples of ways in which the actions of senior management differentiated firm performance during the recent market crisis.
Describe and give examples of ways in which the management of liquidity, credit, and market risk differentiated firm performance during the recent m
Discuss problems and shortcomings firms encountered in their use of VaR and stress tests.
Martin Hellwig, Systemic Risk in the inancial Sector: An Analysis of the Subprime-Mortgage
Financial Crisis, (November 2008). MPI Collective Goods Preprint, No. 2008/43.
Explain the maturity mismatch problem in real estate finance and how securitization addresses it.
Explain how tranching could reduce moral hazard in origination and other incentive problems.
Explain the reasons why moral hazard was not eliminated in the process of securitization.
Explain why investors were keen to put their funds into subprime mortgage finance.
Describe the probable reasons why the rating agencies failed to provide accurate ratings for subprime MBS.
Explain how the subprime-mortgage crisis turned into a worldwide financial crisis due to the buildup of systemic risk.
UBS, Shareholder Report on UBSs Write-Downs, (April 2008).

Discuss factors that contributed to UBS holding more CDO-related risk over time, including hedging and position limit decisions.
Discuss the impact growth and revenue pressures had on internal decision making processes at UBS.
Describe the primary market risk monitoring metrics used by UBS and discuss risk control mechanisms that UBS did not have in place.
Describe shortcomings of the data used by UBS for CDO volatility modeling, the problems caused by a failure to look through the CDO structure to t
Describe shortcomings in UBSs risk reporting framework including the impact of hedging assumptions on VaR calculations.
Discuss mismatches in UBSs funding/liability framework.
Discuss problems that derived from UBSs reliance on external ratings.
Describe problems related to UBSs trade approval process and the organizational relationship between structuring and trading groups.
Describe compensation structure issues that contributed to excessive or poorly controlled risk taking at UBS.
Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: A Panoramic V 73

Centuries of Financial Crises, (April 2008).
Describe historical default patterns and their relationship to major domestic macro economic factors,
Describe typical default patterns as a function of a nations stage of development.
Explain the factors that may drive serial default patterns amongst sovereign debtors and ways to b
Discuss the transmission mechanisms that can propagate shocks throughout the sovereign debt m
Darrell Duffie, The Failure Mechanics of Dealer Banks, (June 2009).

Describe the major functions of large dealer banks and explain the firm-specific and systemic risk factors attendant to each.
Describe the structure of the major markets in which large dealer banks operate.
Explain how diseconomies of scope in risk management and corporate governance may arise in large dealer banks.
Discuss various factors that can precipitate or accelerate a liquidity crisis at a dealer bank and what prudent risk management steps can be taken to mit
Relate a liquidity crisis at a dealer bank to a traditional bank run.
Discuss policy measures that could alleviate some of the firm-specific and systemic risks related to large dealer banks.
74
75
76
77
78
79
80
81
2011 AIMS 2012 Reading #
MARKET RISK MEASUREMENT AND MANAGEMENTPart II Exam Weight |
Hull, Options, Futures, and Other Derivatives, 7th Edition. 29.1

Chapter 18...
Explain how put-call parity indicates that the implied volatility used to price call options is the same used to price put opt
Relate the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and
Explain why foreign exchange rates are not necessarily lognormally distributed and the implications this can have on optio
Describe volatility term structures and volatility surfaces and how they may be used to price options.
Chapter 24 29.2
List and describe how various option characteristics can transform standard American options into nonstandard America
Forward start options
Compound options
Chooser and barrier options
Binary options
Lookback options
Shout options
Asian options
Exchange options
Rainbow options
Basket options
Explain the basic premise of static option replication and how it can be applied to hedging exotic options.
Tuckman, Fixed Income Securities, 2nd Edition. 30.1

Chapter 6 ...
Describe advantages, disadvantages, and limitations of the use of price sensitivities based on parallel shifts of the yield c
Explain how coupon rate, maturity, and yield impact the duration and DV01 of a fixed income security.
Define DV01 in terms of Macaulay duration and use this definition to explain and differentiate between the "duration" effe
Define yield-based convexity and explain how yield-based convexity changes for changes in maturity.
Explain the difference between a barbell and a bullet portfolio and analyze the impact convexity may have on both.
Chapter 7 ... 30.2
Describe and analyze the major weakness attributable to single-factor approaches when hedging portfolios or implementi
Describe the key rate exposure technique in multifactor hedging applications and discuss its advantages and disadvantag
Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a specific key
Discuss why hedges based on key rates only approximate an immunized position in the underlying assets.
Explain the main differences between the key rate shift and the bucket shift approach to manage interest rate risks.
Chapter 9 ... 30.3

Using replicating portfolios develop and use an arbitrage argument to price a call option on a zero-coupon security. In add
Explain why the option cannot be properly priced using expected discounted values
Explain the role of up-state and down-state probabilities in the option valuation
Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple pe
Calculate the value of a constant maturity Treasure swap, given an interest rate tree and the risk-neutral probabilities.
Discuss the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed inc
Explain why the Black-Scholes-Merton model to value equity derivatives is not appropriate to value derivatives on fixed i
Describe the impact of embedded options on the value of fixed-income securities.
31
Chapter 21...
With respect to mortgage-backed securities, define: mortgage, primary market, secondary market, pass-through.
Calculate interest and principal payments for a level payment mortgage.
Define a homeowners prepayment option and relate it to a bonds call option.
Describe the impact of interest rate changes on the value of the prepayment option and discuss non-interest rate factors that may trigger mortgage pr
Define and describe in the context of mortgages: current coupon rate, due on sale, lock-in effect, points, media effect, burnout effect.
Describe reasons why actual mortgage prepayments behavior may be sub-optimal from a financial valuation perspective.
Discuss the main features as well as the advantages and disadvantages of using static cash flow, implied, and prepayment models in the pricing of mort
Describe the major components of prepayment models and how each variable impacts prepayments.
Explain path dependence and path independence as it relates to the valuation of mortgage-backed securities.
Describe how Monte-Carlo simulation can be used to address issues of path dependence.
Discuss the advantages and disadvantages of Monte-Carlo simulation for valuing options.
Discuss the calculation of OAS (option-adjusted-spread) when using Monte-Carlo simulations for mortgage-backed security pricing.
Compare the impact of interest rate changes on a non-repayable mortgage and a mortgage pass-through security.
Describe the major features of CMOs (collateralized mortgage obligations), PAC (planned amortization class) bonds, and IO (interest only) and PO (prin
Discuss the impact of interest rates and prepayments on different portions of CMOs, IO and PO strips.
Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition. 32.1
Chapter 6 ...
Chapter 11... 32.2
Map a fixed-income portfolio into positions of standard instruments.
Describe the method of mapping forwards, commodity forwards, forward rate agreements, and interest-rate swaps.
Kevin Dowd, Measuring Market Risk, 2nd Edition. 33.1

Chapter 3 ...
Estimate VaR using a historical simulation approach.
Estimate VaR using a parametric estimation approach assuming that the return distribution is either normal or lognormal
Chapter 4 ... 33.2

Age-weighted historic simulation
Volatility-weighted historic simulation
Correlation-weighted historic simulation
Filtered historical simulation
Chapter 5 ... 33.3

Chapter 7 ... 33.4

Frank Fabozzi, Handbook of Mortgage Backed Securities, 6th Edition (New York: McGraw-Hill, 2006). 34.1
Chapter 1 ...
Define and explain the key characteristics of a mortgage contract, including:
Lien status
Original loan term
Interest-rate type
Credit guarantees
Loan balance
Borrower type
Describe and calculate the mortgage payment factor.
Identify graphically the effect loan term and interest rates have on loan balance over time.
Identify and explain the roles of major players in the mortgage industry.
Describe the loan underwriting process, and explain important measures of creditworthiness, including:
Credit score
Loan-to-value ratio
Income ratios
Documentation
Describe the various risk associated with mortgages and mortgage backed securities and explain risk based pricing.
34.2
34.3
Chapter 31...
Describe how static valuation of mortgage backed securities differs from dynamic valuation.
Explain the option adjusted spread (OAS) approach to valuing mortgage backed securities.
Interpret the OAS.
Define option-adjusted duration, option adjusted convexity and simulated average life.
Describe the OAS approach to value different types of CMOs and how to interpret the results relative to those provided by static analysis.
CREDIT RISK MEASUREMENT AND MANAGEMENTPart II Exam Weight | 25%
Adam Ashcroft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, 35
Reserve Bank of New York Staff Reports, no. 318 (March 2008). Copy available at: www.GARPDigitalLibrary.org
List and discuss key frictions in the subprime mortgage securitization:
Assess the relative contribution of each factor to the subprime mortgage problems
Discuss the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower, th
Discuss the implications credit ratings had on the emergence of subprime related mortgage backed securities.
Eduardo Canabarro and Darrell Duffie, Measuring and Marking Counterparty Risk in ALM of Financial I 36
ed. Leo Tilman (London: Euromoney Institutional Investor, 2003). Copy available at: www.GARPDigitalLibrary.org
Identify and explain the steps of using a Monte Carlo simulation engine to model potential future exposure to a counterp

Describe the procedures for computing the market value of credit risk when one or both counterparties in the derivatives
Darrell Duffie, Innovations in Credit Risk Transfer: Implications for Financial Stability (July 2008).
Copy available at: www.GARPDigitalLibrary.org
Discuss major benefits of credit risk transfer.
Discuss the potential problems arising out of credit risk transfer.
Explain the lemons premium and moral hazard costs incurred by banks when transferring crest risk to another investor.
Explain how CDS hedging and loan syndication can be near substitutes for loan sales.
Explain how fractional retention of a loan could signal commitment of the loan seller.
Explain the incentives for creation of CDOs.
Explain how default correlation across a pool of loans affects the market value of individual CDO tranches.
Discuss industry use of copulas to price and hedge CDOs and tranched index products:
Describe the impact of ineffective pricing and hedging of CDOs, and explain the role of ineffective hedging in the ratings downgrade of General Motors
37
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital and Risk (Hoboken, NJ 38.1
John Wiley & Sons, 2006).
Chapter 12...
Describe the mechanics of a single named credit default swap (CDS), and discuss particular aspects of CDSs such as sett
Describe portfolio credit default swaps, including basket CDS, Nth to Default CDS, Senior and Subordinated Basked CDS.
Explain the mechanics of asset default swaps, equity default swaps, total return swaps and credit linked notes.
Chapter 13... 38.2

Discuss the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and satisfaction
Define and describe the process of tranching and subordination, and discuss the role of loss distributions and credit rating
Chapter 16... 38.3

Analyze the differences in the mechanics of issuing securitized products using a trust or special purpose entity.
List and discuss the four guiding principles of FAS140 and the conditions necessary to be a qualified special purpose vehic
Describe how a typical Enron transaction violated FAS140 and explain the anti-Enron rule, FIN46R.
Discuss the various types of internal and external credit enhancements and interpret a simple numerical example.
Explain the impact liquidity, interest rate and currency risk has on a securitized structure, and list securities that hedge
Discuss the securitization process for mortgage-backed securities and asset-backed commercial paper.
Chapter 17... 38.4

Define collateralized debt obligations (CDO) and discuss the motivations of CDO buyers and sellers.
de Servigny and Renault, Measuring and Managing Credit Risk. 39.1

Chapter 3 ...
Describe the Merton model for corporate security pricing, including its assumptions, strengths and weaknesses:
Illustrate and interpret security-holder payoffs based on the Merton model
Using the Merton model, calculate the value of a firm's debt and equity and the volatility of firm value
Discuss the results and practical implications of empirical studies that use the Merton model to value debt
Describe the Moodys KMV Credit Monitor Model to estimate probability of default using equity prices:
Compare the Moodys-KMV's equity model with the Merton model
Discuss credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibility, transparency an
Define and differentiate among the following quantitative methodologies for credit analysis and scoring:
Linear discriminant analysis
Parametric discrimination
K-nearest neighbor approach
Support vector machines
Minimum error
Minimum risk
Neyman-Pearson
Minimax
raw-Hill,2004).
Chapter 4 ... 39.2
Seniority
Industrial sector
Business cycle
Collateral
Jurisdiction
Discuss the beta distribution approach, kernel modeling, and conditional recovery modeling to estimate of the recovery
Hull, Options, Futures, and Other Derivatives, 7th Edition. 40.1

Chapter 22 ...
Identify ratings of Moodys, Standard & Poors and Fitch that correspond to investment and non-investment grade securit
Netting
Collateralization
Downgrade triggers
Chapter 23... 40.2

Compute the value of a CDS, given unconditional default probabilities, survival probabilities, market yields, recovery rate
Discuss the implications of marking-to-market CDSs.
Identify and explain the functions and uses of:
Basket CDSs.
Total return swaps.
Describe asset backed securities including collateralized debt obligations (CDOs) and explain:
Tranches
Role of credit ratings
Synthetic CDOs
Role of correlation in valuing CDOs
Discuss the use of the Gaussian Copula Model to measure the time to default.
Allen, Boudoukh and Saunders, Understanding Market, Credit and Operational Risk: The Value at Risk 41
Chapter 4 ...
Describe the following traditional approaches to measuring Credit Risk:
Expert systems
Rating systems
Credit scoring models
Explain the relationship between the yield spread and the probability of default, and calculate default probability of a deb
Stulz, Risk Management & Derivatives. 42
Chapter 18...
Explain the differences between valuing senior and subordinated debt using a contingent claim approach.
Explain, from a contingent claim perspective, the impact stochastic interest rates have on the valuation of risky bonds, equ
Discuss the fundamental differences between CreditRisk+, CreditMetrics and KMV credit portfolio models.
Define a vulnerable option, and explain how credit risk can be incorporated in determining the option's value.
Ong, Internal Credit Risk Models: Capital Allocation and Performance Measurement. 43
Chapter 6 ...
Explain the relationship between expected and unexpected losses for an individual asset and a portfolio of asset.
Explain how the recovery rate, credit quality, and expected default frequency affect the expected and unexpected loss.
Explain the different impact diversifiable and un-diversifiable risk has on portfolio expected and unexpected loss, respecti
Define, calculate and interpret the effect correlation has on the expected and unexpected losses in a portfolio.
Studies on credit risk concentration: an overview of the issues and a synopsis of the results from the Research
Task Force project (Basel Committee on Banking Supervision Publication, November 2006).
Define and differentiate between systematic risk and idiosyncratic risk in the context of the Basel II IRB model.
Describe how concentration risk may arise in a credit portfolio.
Describe key assumptions of the Asymptotic Single-Risk Factor (ASRF) model.
Describe how concentration risk in a credit portfolio violates the assumptions of the ASRF model and what the implications of this are.
Discuss imperfect granularity, its impact on economic capital, and proposed adjustments.
Discuss the potential impact of sectoral concentration on capital requirements within the Basel II IRB model.
Describe contagion risk in the context of credit portfolios and some of the difficulties in estimating it.
Describe desirable properties for stress tests of sector concentration risk, including:
Plausibility
Consistency
Adaptability to the portfolio
Adaptability to internal reporting requirements
Describe open issues related to modeling concentration risk, particularly those related to:
The adequacy of sector schemes
The definition of a benchmark for concentration risk correction
Data-related issues
OPERATIONAL AND INTEGRATED RISK MANAGEMENTPart II Exam Weight |
Michel Crouhy, Dan Galai and Robert Mark, Risk Management (New York: McGraw-Hill, 2001). 44
Chapter 14...
Describe the RAROC (risk-adjusted return on capital) methodology and discuss some of the potential benefits of its use.
Compute and interpret the RAROC for a loan or loan portfolio, and use RAROC to compare business unit performance.
Explain the difficulties encountered in attributing economic capital to operational risk.
Describe the Loan Equivalent Approach and use it to calculate RAROC capital.
Explain how the second-generation RAROC approaches improve economic capital allocation decisions.
Range of practices and issues in economic capital modeling (Basel Committee on Banking Supervisio 45
Publication, March 2009). Copy available at: www.GARPDigitalLibrary.org
Defining risk measures
Risk aggregation
Validation of models
Dependency modeling in credit risk
Evaluating counterparty credit risk
Assessing interest rate risk in the banking book
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designed
Discuss the constraints imposed and the opportunities offered by economic capital within the following areas:
Credit portfolio management
Risk based pricing
Customer profitability analysis
Management incentives.
Dowd, Measuring Market Risk, 2nd Edition. 46.1

Chapter 14...
Describe the challenges of estimating liquidity-adjusted VaR (LVaR).
Describe and calculate LVaR using the Constant Spread approach and the Exogenous Spread approach.
Explain the role of liquidity in crisis situations and discuss approaches to estimating crisis liquidity risk.
Chapter 16... 46.2
Define model risk.
Incorrect model specification
Incorrect model application
Implementation risk
Incorrect calibration
Programming and data problems
work as outlined in the Sound Practices study published by BIS in February 2003:
ion 404 of the Sarbanes-Oxley (SOX) Act of 2002.

asel requirements on operational risk management, and how an operational risk management framework can be designed to help meet both sets of requirements.
ss its limitations.
conglomerate.
n for a financial conglomerate.

al conglomerate.
Jimmy Hong, John Knight, Steve Satchell and Bernd Scherer, Using approximate results for validating
value-at-risk, The Journal of Risk Model Validation, Volume 4/Number 3, Fall 2010: pp. 69-81.
Describe the issues related to using long or short periods to estimate VaR.
Describe the basic framework for estimating the asymptotic distribution for VaR.
Describe the procedure to investigate different methods of computing VaR.
Discuss methods to obtain confidence intervals of VaR estimates.
47.1
47.2
47.3
47.4
Brian Nocco and Ren Stulz, Enterprise Risk Management: Theory and Practice, Journal of Applied Co 48
Finance 18, No. 4 (2006): 8-20. Copy available at: www.GARPDigitalLibrary.org
Explain how implementing ERM practices and policies create shareholder value both at the macro and the micro level.
ss distributions.
t be considered in:
tress testing, back testing and benchmarking.
of market risk, credit risk, structural asset/liability risk, operational risk and business risk as known, unknown and unknowable.
unknowable risks.
risk, credit risk, structural asset/liability risk, operational risk and business risk to bank earnings volatility.
nts in risk management.
and management of liquidity risk and public disclosure
Mo Chaudhury, A review of the key issues in operational risk capital modeling, The Journal of Operatio 49
Volume 5/Number 3, Fall 2010: pp. 37-66.
Discuss the loss distribution approach to measuring operational risk.
Discuss issues related to external and internal operational loss data sets.
Discuss how frequency and severity distributions of operational losses are obtained.
Discuss how a loss distribution is obtained from frequency and severity distributions.
Explain how operational losses are aggregated across various types using dependence modeling.
Eric Cope, Giulio Mignola, Gianluca Antonini and Roberto Ugoccioni, Challenges and pitfalls in measuri 50
operational risk from loss data, The Journal of Operational Risk, Volume 4/Number 4, Winter 2009/10: pp. 3-27.
Discuss the nature of operational loss distributions.
Discuss the consequences of working with heavy tailed loss data.
Determine the amount of data required to estimate percentiles of loss distributions.
Describe methods of extrapolating beyond the data.
Explain the loss distribution approach to modeling operational risk losses.
Explain the challenges in validating capital models.
Patrick De Fontnouvelle, Eric S. Rosengren and John S. Jordan, 2006. Implications of Alternative Opera 51
Risk Modeling Techniques. Ch. 10 in Mark Carey and Ren Stulz (eds.), Risks of Financial Institutions, NBER,
475-505. And comment by Andrew Kuritzkes 505-511.
Describe the properties of distributions of operational loss data.
Give a descriptive analysis of operational loss data.
Describe ways to fit distributions to operational loss data.
Carry out a threshold analysis of operational loss data.
Describe how the aggregate loss distribution is developed.
2011 Reading # 46
ve use of risk measures not designed for regulatory purposes.

within the following area:
Darrell Duffie, 2010. Failure Mechanics of Dealer Banks. Journal of Economic Perspectives 24:1, 51-72. 52
Candidates, after completing this reading, should be able to:
Describe the major functions of large dealer banks and explain the firm-specific and systemic risk factors attendant to ea
Discuss various factors that can precipitate or accelerate a liquidity crisis at a dealer bank and what prudent risk manage
Readings for Basel Reference
Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framew 53
Comprehensive Version (Basel Committee on Banking Supervision Publication, June 2006).
Describe the key elements of the three pillars of Basel II:
Minimum capital requirements
Supervisory review
Market discipline
Describe the type of institutions that the Basel II Accord will be applied to.
Describe the major risk categories covered by the Basel II Accord.
Describe and contrast the major elements of the three options available for the calculation of credit risk:
Standardised Approach
Foundation IRB Approach
Advanced IRB Approach
Describe and contrast the major elements of the three options available for the calculation of operational risk:
Basic Indicator Approach
Advanced Measurement Approach
Describe and contrast the major elementsincluding a description of the risks coveredof the two options available for the
Standardised Measurement Method
Internal Models Approach
Capital ratio
Capital charge
Risk weights and risk-weighted assets
Tier 1 capital and its components
Probability of default (PD)
Loss given default (LGD)
Exposure at default (EAD)
Maturity (M)
Stress tests
Concentration risk
Residual risk
to complex and illiquid financial instruments.
Basel III: A global regulatory framework for more resilient banks and banking systems (Basel Commit 54
Banking Supervision Publication, December 2010). Copy available at: www.GARPDigitalLibrary.org
Discuss reasons for the changes implemented through the Basel III framework.
Describe changes to the regulatory capital framework, including changes to:
The measurement, treatment, and calculation of Tier 1, Tier 2, and Tier 3 capital
Risk coverage, the use of stress tests, the treatment of counter-party risk, and the use of external ratings
The use of leverage ratios
Discuss changes designed to dampen the procyclical amplification of financial shocks and to promote counter-cyclical buf
Describe changes intended to improve the handling of systemic risk.
Describe changes intended to improve the management of liquidity risk including liquidity coverage ratios, net stable funding ratios, and the use of mo
Basel III: International framework for liquidity risk measurement, standards and monitoring (Basel C 55
on Banking Supervision Publication, December 2010). Copy available at: www.GARPDigitalLibrary.org
Define and discuss the minimum liquidity coverage ratio.
Define and discuss the net stable funding ratio.
Define and discuss practical applications of prescribed liquidity monitoring tools, including:
Contractual maturity mismatch
Concentration of funding
Available unencumbered assets
Liquidity coverage ratio by significant currency
Market related monitoring tools
Guidelines for computing capital for incremental risk in the trading book - final version (Basel Committee on
Banking Supervision Publication, July 2009). Copy available at: www.GARPDigitalLibrary.org
Explain the regulatory reason for incorporating the incremental default risk charge into the trading book capital calculation.
Describe perceived shortcomings in the original VaR framework for measuring risk in the trading book.
Define the risks captured by the incremental risk charge and the key supervisory parameters for computing the incremental risk charge.
Define the frequency banks must calculate the incremental risk charge.
Calculate the capital charge for incremental risk as a function of recent increment risk charge measures.
Revisions to the Basel II market risk framework- final version (Basel Committee on Banking Supervisio 56
Publication, July 2009). Copy available at: www.GARPDigitalLibrary.org
Explain the relationship regulators require between market risk factors used for pricing versus those used for calculating
Explain and calculate the stressed value-at-risk measure and the frequency which it must be calculated.
Developments in Modelling Risk Aggregation (Basel Committee on Banking Supervision Publication, J 57

Describe frameworks for risk aggregation.
Describe risk aggregation methods within regulatory frameworks.
Describe approaches of validation and management of models in risk aggregation.
Describe diversification effects in risk aggregation.
RISK MANAGEMENT AND INVESTMENT MANAGEMENTPart II Exam Weight | 15%
Grinold and Kahn, Active Portfolio Management: A Quantitative Approach for Producing Superior Retur 58
Controlling Risk, 2nd Edition. (New York: McGraw-Hill, 2000).
Chapter 14...
Discuss practical issues in portfolio construction such as determination of risk aversion, incorporation of specific risk av
Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time horizon.
Discuss the optimal no-trade region for rebalancing with transaction costs
Screens
Stratification
Linear programming
Quadratic programming
g Superior Returns and Controlling Risk, 2nd Edition.

Chapter 17...
Describe the goal of performance analysis and its uses for investors and fund managers.
Discuss the tradeoff of skill and luck in fund management, including the implication of the efficient market hypothesis for active management.
Define and compute the compound total return, geometric average return, average log return and the arithmetic average return for a portfolio.
Describe cross-sectional analysis of performance data and discuss shortcomings of this approach.
Describe the return regression approach to performance analysis and interpret resulting alpha values.
Describe refinements to the basic return-based performance assessment models including Bayesian correction, adjustments for heteroskedasticity and
Describe portfolio-based performance analysis, including the use of performance attribution and performance analysis.
Define, describe and calculate active systematic returns, expected active beta returns, active beta surprise, and active benchmark timing return.
allocation and diversification characteristics.
dge fund managers and the IRC-recommended alternative to full position disclosure.
dge funds manager.
al long-only investment funds.
ifts for hedge fund investors.
Eugene Fama and Kenneth French, 2004. The Capital Asset Pricing Model: Theory and Evidence, Journ 59
Economic Perspectives 18:3, 25-46.
Explain the logic of the CAPM.
Describe empirical tests of the CAPM and their conclusions.
Describe explanations for the results of the empirical tests of CAPM.
Explain the market proxy problem.
Matches 2011 Reading # 64
ous hedge fund strategies including
Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition. 60.1
Chapter 7 ...
Explain the difference between risk management and portfolio management, and demonstrate how to use marginal VaR
ition (New York: McGraw-Hill, 2007).
Chapter 17... 60.2
Discuss the impact horizon, turnover and leverage have on the risk management process in the investment management
Define and describe the following types of risk:
Absolute risk
Relative risk
Policy-mix risk
Active management risk
Funding risk
Sponsor risk
Describe how VaR can be used to check compliance, monitor risk budgets and reverse engineer sources of risk.
Explain how VaR can be used in the investment process and development of investment guidelines.
Describe the risk budgeting process across asset classes and active managers:
Define tracking error and information ratio.
erformance of the funds.

nd disclosure requirements for hedge funds.
than mutual funds at making markets efficient.
ling bias and valuation.
d institutional investments and regulation.
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilib 61
Approach (Hoboken, NJ: John Wiley & Sons, 2003).
Chapter 17...
Comparison of performance with expectations
Return attribution
Metrics such as Sharpe and information ratios
Comparisons with benchmark portfolios and peer groups.
Matches 2011 Reading # 69
be subject to a risk budget.
erations for maintaining a quality VaR measure.
olling risk including: (i) asset allocation, (ii) investment guidelines, (iii) standard deviation, (iv) beta, and (v) duration.
Lars Jaeger, Through the Alpha Smoke Screens: A Guide to Hedge Fund Returns (New York: Euromoney
Institutional Investor Books, 2005).
Chapter 5 ...
Describe the underlying characteristics, sources of returns and risk exposures of various hedge fund strategies including:
Equity long/short
Market-neutral
Statistical arbitrage
Market timing
Short-selling
Distressed securities
Fixed-income arbitrage
Capital structure arbitrage
Event-driven and merger arbitrage
Global macro
Regulation D
Commodity trading adviser
Relative value
Volatility arbitrage
Describe the reasons behind market inefficiencies and ways to exploit these inefficiencies.
Explain the importance of individual fund managers skill in performance of hedge funds.
62
63.1
63.2
63.3
differences in legislation.
Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz, Trust and Delegation, May 28, 64
Explain the role of third party due diligence firms in the delegated investment decision-making process.
Explain how past regulatory and legal problems with hedge fund reporting relates to expected future operational events.
Explain the role of the due diligence process in successfully identifying inadequate or failed internal process.
Stephen Dimmock and William Gerken, Finding Bernie Madoff: Detecting Fraud by Investment Managers,
(December 2009). Copy available at: www.GARPDigitalLibrary.org
Discuss the importance of predicting fraud of investment managers.
Explain how Form ADV helps in predicting investment fraud.
Discuss whether investors are compensated for fraud risk.
Discuss whether there is predictive capability in information hidden in Form ADV.
Discuss firm death and investor outflows with respect to type of fraud disclosure.
65
Amir E. Khandani and Andrew W. Lo, An Empirical Analysis of Hedge Funds, Mutual Funds, and U.S. Eq 66
Portfolios, June 24, 2009. Copy available at: www.GARPDigitalLibrary.org
Describe how asset return autocorrelation can be used as a measure of the assets liquidity.
Explain the process of estimating the risk premium associated with illiquidity (illiquidity premia) using autocorrelations.
Compare illiquidity premia across hedge funds, mutual funds and U.S equity portfolios.
Discuss time series properties of illiquidity premia.
Andrew W. Lo, Risk Management for Hedge Funds: Introduction and Overview, Financial Analysts Jour 67
Vol. 57., No. 6 (Nov.-Dec., 2001), pp. 16-33.
Compare and contrast the investment perspectives between institutional investors and hedge fund managers.
Explain how proper risk management can itself be a source of alpha for a hedge fund.
Explain the limitations of the VaR measure in capturing the spectrum of hedge fund risks.
Explain how survivorship bias poses a challenge for hedge fund return analysis.
Describe how dynamic investment strategies complicate the risk measurement process for hedge funds.
Describe how the phase-locking phenomenon and nonlinearities in hedge fund returns can be incorporated into risk mod
Explain how autocorrelation of returns can be used as a measure of liquidity of the asset.
Leslie Rahl (editor), Risk Budgeting: A New Approach to Investing (London: Risk Books, 2004). 68
Chapter 6 ...
Michelle McCarthy
Identify practices that can decrease the validity of a VaR measure and discuss considerations for maintaining a quality V
Compare and contrast risk budgeting with traditional means of measuring and controlling risk including: (i) asset allocation,
Steven N. Kaplan and Per Stromberg, 2009. Leveraged Buyouts and Private Equity Journal of Economic
Perspectives 23:1, 121-146. Copy available at: www.GARPDigitalLibrary.org
Describe how a private equity firm raises capital.
Describe a typical private equity transaction.
Describe the sets of changes that the private equity firms apply to the firms in which they invest.
Describe boom and bust cycles in private equity.
CURRENT ISSUES IN FINANCIAL MARKETSPart II Exam Weight | 10%

Gary Gorton, The Panic of 2007, (August 2008). Copy available at: www.GARPDigitalLibrary.org
Explain the evolution of the subprime mortgage market.
List differences between prime and subprime mortgages and borrowers.

Describe the design of Subprime Residential Mortgage Backed Securities (RMBS).
Explain the role of CDOs in subprime securitization.
Explain how the ABX information together with the lack of information about the location of risks led to a loss in confidence on the part of banks.
Raghuram Rajan, Has Financial Development Made The World Riskier? (September 2005).
List key drivers of change in the financial landscape over the past thirty years and describe their impact.
Describe ways in which incentive structures for investment managers today differ from those of bank managers of the past and the types of perverse b
Describe the impact technology has had on bank lending, regulation, and competition.
Explain how banks capital structure may explain banks organizational form.
Discuss how the risk-transfer and risk-warehousing function of banks has impacted the overall riskiness of the banking system.
Explain the link between market integration and the demands on market superstructures.
Explain the following topics as they relate to investment manager behavior patterns:
Hidden tail risk
Herding
Low interest rates
Describe how modern bank behavior may impact market liquidity in a downturn.
Differentiate between micro-prudential and macro-prudential reasons for supervision and describe some of the instruments of prudential supervision.
uring the recent market crisis.

rentiated firm performance during the recent market crisis.
d market risk differentiated firm performance during the recent market crisis.
ngs for subprime MBS.

e to the buildup of systemic risk.
cluding hedging and position limit decisions.

ocesses at UBS.
ntrol mechanisms that UBS did not have in place.
blems caused by a failure to look through the CDO structure to the underlying assets, and other deficiencies in UBSs risk measuring and monitoring tools.
dging assumptions on VaR calculations.
lationship between structuring and trading groups.

olled risk taking at UBS.
Carmen Reinhart and Kenneth Rogoff, This Time is Different: A Panoramic View of Eight Centuries of Financial
Crises. Copy available at: www.GARPDigitalLibrary.org
Describe historical default patterns and their relationship to major domestic macro economic factors, international trade and capital flows, and politica
Describe typical default patterns as a function of a nations stage of development.
Explain the factors that may drive serial default patterns amongst sovereign debtors and ways to break these patterns.
Discuss the transmission mechanisms that can propagate shocks throughout the sovereign debt market.
2011 Reading # 53
systemic risk factors attendant to each.
may arise in large dealer banks.

bank and what prudent risk management steps can be taken to mitigate these risks.
sks related to large dealer banks.
Bennett Golub and Conan Crum, Risk Management Lessons Worth Remembering from the Credit Crisis of
2007-2009, (October 2009). Copy available at: www.GARPDigitalLibrary.org
Explain the need for alignment of institutional interest and institutional buy-in for successful risk management.
Explain the need for independent risk management organizations.
Describe the effectiveness of bottom-up risk management.
Explain why risk models require constant vigilance.
Describe the lessons from the crisis worth remembering related to liquidity of assets, sources of liquidity, the opacity of markets and collateralization.
Findings Regarding the Market Events of May 6, 2010, (Executive Summary) Report of the Staffs of the CFTC
and SEC to the Joint Advisory Committee on Emerging Regulatory Issues (September 2010).
Describe the liquidity crisis in the E-mini markets on May 6th.
Describe the liquidity crisis in the equities markets on May 6th.
Explain the role of high frequency traders and cross market arbitrageurs in the flash crash.
Explain how an automated execution of a large sell order can trigger extreme price movements.
Gregory Connor, Thomas Flavin, and Brian OKelly, The U.S. and Irish Credit Crises: Their Distinctive Di 69
and Common Features. Copy available at: www.GARPDigitalLibrary.org
Describe similarities and differences between the US and Irish crisis.
Discuss how investor and market sentiment can lead to asset price inflation and bubbles.
Differentiate between rational and irrational exuberance.
Discuss the difference in the role of capital flows in the US and Irish crises.
Describe the role of regulators in the US and Irish crises.
Define and discuss moral hazard and the role it played in the US and Irish crises.
70
Eli Remolona, Michela Scatigna and Eliza Wu, Interpreting sovereign spreads, BIS Quarterly Review, March 2007.
Describe some advantages to using credit ratings as a measure of sovereign risk.
Discuss possible sources of variation between observed sovereign spreads and credit ratings.
Describe the relationship between credit rating scales and implied probabilities of default.
Discuss the relationship between observed sovereign CDS spreads and other indicators of sovereign risk.
Describe how sovereign spreads can be decomposed into expected loss and risk premia.
Discuss what is meant by the credit spread puzzle and how it can vary across countries.
Making Over-the-Counter Derivatives Safer: The Role of Central Counterparties. IMF Global Financial Stability
Report, April 2010, Chapter 3. Copy available at: www.GARPDigitalLibrary.org
Describe the mechanics of OTC derivatives clearing.
Discuss the basics of novation, bilateral, and multilateral netting.
Discuss counterparty risk in the OTC derivatives markets and some of the risk management techniques commonly employed to mitigate it.
Describe how central counterparties can reduce counterparty risk.
Discuss some of the challenges to the widespread use of central counterparties in the OTC derivative markets.
FSF Principles for Sound Compensation Practices, Financial Stability Forum, April 2009.
Explain compensation risk and its involvement in the recent crisis.
Discuss the effective governance of compensation, identifying key roles and methods.
Discuss the effective alignment of compensation with prudent risk taking.
Compare and contrast a judgment based system vs a quantitative measures system for risk alignment principles
Provide examples of asymmetric compensation outcomes.
Explain the relationship between the time horizon of risk and risk accumulation in conjunction with compensation practices.
Discuss the importance of effective supervisory oversight and engagement by stakeholders as it relates to the evolution of compensation practices.
Brunnermeier, Markus, 2009. Deciphering the Liquidity and Credit Crunch 2007-2008. Journal of Economic
Perspectives 23:1, 77-100.
Discuss banking industry trends that led up to the liquidity squeeze.
Describe securitization and the originate-to-distribute model.
Discuss methods of asset/liability maturity management banks employed ahead of the liquidity crunch and their associated risks.
Describe and differentiate between funding liquidity and market liquidity.
Describe and differentiate between a loss spiral and a margin spiral.
Describe and discuss network risk.
Examiners Report on Lehman, Appendix 8 (pages 1-49). Copy available at: www.GARPDigitalLibrary.org
Describe the role of Lehmans risk committee .
Discuss the functions and responsibilities of Lehmans risk management group.
Discuss Lehmans policies on:
Funding adequacy controls
Transaction limits
Balance sheet limits
Stress tests
Discuss the risk metrics used by Lehman, and identify where there were discrepancies between the metrics used for internal controls and those used fo
Explain the role of the Consolidated Supervised Entities Program and how it fit with the SECs regulation of Lehman.
Explain the situation arising from Lehmans public filings on Other Measures of Risk.
Discuss the inconsistencies brought forth regarding Lehman boards risk committee during the examination.
71
72
73.1
73.2
73.3
2012 AIMS
Hull, Options, Futures, and Other Derivatives, 8th Edition

Chapter 19
Explain how put-call parity indicates that the implied volatility used to price call options is the same used to price put options.
Relate the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pricing of options on th
Explain why foreign exchange rates are not necessarily lognormally distributed and the implications this can have on option prices and implied volatility
Chapter 25
List and describe how various option characteristics can transform standard American options into nonstandard American options.
Compound options
Binary options
Lookback options
Shout options
Asian options
Exchange options
Rainbow options
Basket options
Tuckman, Fixed Income Securities, 2nd Edition.

Chapter 6 ...
Describe advantages, disadvantages, and limitations of the use of price sensitivities based on parallel shifts of the yield curve.
Explain how coupon rate, maturity, and yield impact the duration and DV01 of a fixed income security.
Define DV01 in terms of Macaulay duration and use this definition to explain and differentiate between the duration effect and the price effect.
Define yield-based convexity and explain how yield-based convexity changes for changes in maturity.
Explain the difference between a barbell and a bullet portfolio and analyze the impact convexity may have on both.
Chapter 7 ...
Describe and analyze the major weakness attributable to single-factor approaches when hedging portfolios or implementing asset liability techniques.
Describe the key rate exposure technique in multifactor hedging applications and discuss its advantages and disadvantages.
Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a specific key rate exposure profile.
Discuss why hedges based on key rates only approximate an immunized position in the underlying assets.
Explain the main differences between the key rate shift and the bucket shift approach to managing interest rate risks.
Chapter 9
Using replicating portfolios, develop and use an arbitrage argument to price a call option on a zero-coupon security. In addition:
Explain why the option cannot be properly priced using expected discounted values.
Explain the role of up-state and down-state probabilities in the option valuation.
Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple periods.
Calculate the value of a constant maturity Treasure swap, given an interest rate tree and the risk-neutral probabilities.
Discuss the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed income securities.
Explain why the Black-Scholes-Merton model to value equity derivatives is not appropriate to value derivatives on fixed income securities.
Describe the impact of embedded options on the value of fixed income securities.
Pietro Veronesi, Fixed Income Securities (Hoboken, NJ: John Wiley & Sons, 2010).
Chapter 8
Summarize the securitization process of residential mortgage backed securities (MBS).
Differentiate between agency and non-agency MBS and describe the major participants in the residential MBS market.
Describe the mortgage prepayment option and the factors that influence prepayments.
Describe the impact on a MBS of the weighted average maturity, the weighted average coupon, and the speed of prepayments of the mortgages unde
Identify, describe, and contrast different standard prepayment measures.
Describe the effective duration and effective convexity of standard MBS instruments and the factors that affect them.
Describe collateralized mortgage obligations (CMOs) and contrast them with MBSs.
Describe and work through a simple cash flow example for the following:
Pass-through securities
CMOs, both sequential and planned amortization class
Interest only and principal only strips
st rate factors that may trigger mortgage prepayments.

edia effect, burnout effect.
on perspective.
nd prepayment models in the pricing of mortgage-backed securities.
e-backed security pricing.
ss) bonds, and IO (interest only) and PO (principal only) strips.
Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition.
Chapter 6 ...
Chapter 11...
Map a fixed income portfolio into positions of standard instruments.
Describe the method of mapping forwards, commodity forwards, forward rate agreements, and interest rate swaps.
Kevin Dowd, Measuring Market Risk, 2nd Edition.

Chapter 3 ...
Estimate VaR using a parametric estimation approach assuming that the return distribution is either normal or lognormal.
Chapter 4 ...
Age-weighted historic simulation
Volatility-weighted historic simulation
Correlation-weighted historic simulation
Filtered historical simulation
Chapter 5 ...
Chapter 7 ...
Frank Fabozzi, Handbook of Mortgage Backed Securities, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2006).
Chapter 1 ...
Describe the key attributes that define mortgages.
Calculate the mortgage payment factor.
Understand the allocation of loan principal and interest over time for various loan types.
Define prepayment risk, reasons for prepayment, and the negative convexity of mortgages.
Explain credit and default risk analysis of mortgages, including metrics for delinquencies, defaults, and loss severity.
Frank Fabozzi, Anand Bhattacharya, William Berliner, Mortgage Backed Securities, 2nd Edition (Hoboken, NJ:
Chapter 2 ...
Describe the evolution of the MBS market.
Explain the creation of agency (fixed rate and adjustable rate) and private-label MBS pools, pass-throughs, CMOs, and mortgage strips.
Understand how a loan progresses from application to agency pooling.
Discuss MBS market structure and the ways that fixed rate pass-through securities trade.
Explain a dollar roll transaction, how to value a dollar roll, and what factors can cause a roll to trade special.
Relate the pricing of mortgage products to developments in MBS markets.
Explain the purpose of cash flow structuring of mortgage backed securities.
Chapter 10 ...
Calculate the static cash flow yield of a MBS using bond equivalent yield (BEY) and determine the associated nominal spread.
Define reinvestment risk.
Describe how the binomial and Monte Carlo valuation methodologies are used for MBS.
Discuss the steps for valuing a mortgage security using Monte Carlo methodology.
Define and interpret option-adjusted spread (OAS), zero-volatility OAS, and option cost.
Explain how to select the number of interest rate paths in Monte Carlo analysis.
Describe total return analysis, calculate total return, and understand factors present in more sophisticated models.
Discuss limitations of the nominal spread, Z-spread, OAS, and total return measures.
ose provided by static analysis.
Adam Ashcroft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal
Reserve Bank of New York Staff Reports, no. 318 (March 2008). Copy available at: www.GARPDigitalLibrary.org
List and discuss key frictions in the subprime mortgage securitization:
Assess the relative contribution of each factor to the subprime mortgage problems.
Discuss the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower, the features and performance of a
Explain the structure of the securitization process of subprime mortgage loans.
Discuss the implications credit ratings had on the emergence of subprime related mortgage backed securities.
Eduardo Canabarro and Darrell Duffie, Measuring and Marking Counterparty Risk in ALM of Financial Institutions,
ed. Leo Tilman (London: Euromoney Institutional Investor, 2003). Copy available at: www.GARPDigitalLibrary.org
Identify and explain the steps of using a Monte Carlo simulation engine to model potential future exposure to a counterparty, and discuss consideration

Describe the procedures for computing the market value of credit risk when one or both counterparties in the derivatives transaction has credit exposu
in the ratings downgrade of General Motors debt.
Eduardo Canabarro, Pricing and Hedging Counterparty Risk: Lessons Re-Learned? (September 2009).
Explain counterparty risk and its evolution.
Understand the following Credit Valuation Adjustment (CVA) examples:
CVA calculation with two (simple model) or three counterparties
CVA calculation unwinding with monoline insurers (a recent example)
CVA calculation using a Monte Carlo model (the full model) and a simplified model
The zero-CVA case
Discuss funding costs and benefits amongst counterparties facing credit exposures.
Describe mark-to-market discipline and price signals for derivatives pricing with CVA.
Compare CVA desk models and the goals of a CVA desk.
Explain the concept of CVA hedging, the risk factors driving CVAs, and why it is important for banks to hedge their CVAs.
Explain how a bank can hedge its credit risk; with particular focus on relevant risk sensitivities, the asset/liability sides of the CVA, and systematic/idiosy
Explain friction costs, wrong-way risks, out-of-the-money risks, netting and collateral, and other credit risk mitigants.
Understand stress tests and counterparty risk systems in a CVA risk management program.
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital and Risk (Hoboken, NJ:
Chapter 12...
Describe the mechanics of a single named credit default swap (CDS), and discuss particular aspects of CDSs such as settlement methods, payments to t
Describe portfolio credit default swaps, including basket CDS, Nth to Default CDS, Senior and Subordinated Basked CDS.
Chapter 13...
Discuss the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and satisfaction of specific investor demands.
Define and describe the process of tranching and subordination, and discuss the role of loss distributions and credit ratings.
Chapter 16...
Analyze the differences in the mechanics of issuing securitized products using a trust vs. special purpose entity.
List and discuss the four guiding principles of FAS140.
Describe how a typical Enron transaction violated FAS140 and explain the anti Enron rule, FIN46R.
Discuss the various types of internal and external credit enhancements and interpret a simple numerical example.
Explain the impact liquidity, interest rate and currency risk has on a securitized structure, and list securities that hedge these exposures.
Discuss the securitization process for mortgage backed securities and asset backed commercial paper.
Chapter 17...
Define collateralized debt obligations (CDO) and discuss the motivations of CDO buyers and sellers.
de Servigny and Renault, Measuring and Managing Credit Risk.

Chapter 3 ...
Illustrate and interpret security-holder payoffs based on the Merton model.
Using the Merton model, calculate the value of a firm's debt and equity and the volatility of firm value.
Discuss the results and practical implications of empirical studies that use the Merton model to value debt.
Describe the Moodys KMV Credit Monitor Model to estimate probability of default using equity prices:
Compare the Moodys-KMV's equity model with the Merton model.
Discuss credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibility, transparency and interpretability.
Linear discriminant analysis
Parametric discrimination
Knearest neighbor approach
Support vector machines
Minimum error
Minimum risk
Neyman-Pearson
Minimax
Chapter 4 ...
Seniority
Industrial sector
Business cycle
Collateral
Jurisdiction
Discuss the beta distribution approach, kernel modeling, and conditional recovery modeling to estimate of the recovery function.
Hull, Options, Futures, and Other Derivatives, 8th Edition.

Chapter 23 ...
Identify ratings of Moodys, Standard & Poors and Fitch that correspond to investment and non-investment grade securities.
Netting
Collateralization
Downgrade triggers
Chapter 24...
Compute the value of a CDS, given unconditional default probabilities, survival probabilities, market yields, recovery rates and cash flows.
Discuss the implications of marking to market CDSs.
Identify and explain the functions and uses of:
Basket CDSs
Total return swaps
Describe asset backed securities including collateralized debt obligations (CDOs) and explain:
Tranches
Role of credit ratings
Synthetic CDOs
Role of correlation in valuing CDOs
Allen, Boudoukh and Saunders, Understanding Market, Credit and Operational Risk: The Value at Risk Approach.
Chapter 4 ...
Describe the following traditional approaches to measuring Credit Risk:
Expert systems
Rating systems
Credit scoring models
Explain the relationship between the yield spread and the probability of default, and calculate default probability of a debt security using the credit spre
Stulz, Risk Management & Derivatives.
Chapter 18...
Explain, from a contingent claim perspective, the impact stochastic interest rates have on the valuation of risky bonds, equity, and the risk of default.
Discuss the fundamental differences between CreditRisk+, CreditMetrics and KMV credit portfolio models.
Define a vulnerable option, and explain how credit risk can be incorporated in determining the option's value.
Ong, Internal Credit Risk Models: Capital Allocation and Performance Measurement.
Chapter 6 ...
Explain the relationship between expected and unexpected losses for an individual asset and a portfolio of assets.
Explain how the recovery rate, credit quality, and expected default frequency affect the expected and unexpected loss.
Explain the different impact diversifiable and un-diversifiable risk has on portfolio expected and unexpected loss, respectively.
Define, calculate and interpret the effect correlation has on the expected and unexpected losses in a portfolio.
the implications of this are.

Michel Crouhy, Dan Galai and Robert Mark, Risk Management (New York: McGraw-Hill, 2001).
Chapter 14...
Describe the RAROC (risk-adjusted return on capital) methodology and discuss some of the potential benefits of its use.
Range of practices and issues in economic capital modeling (Basel Committee on Banking Supervision
Publication, March 2009). Copy available at: www.GARPDigitalLibrary.org
Risk aggregation
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designed for regulatory purposes.
Discuss the constraints imposed and the opportunities offered by economic capital within the following areas:
Risk based pricing
Management incentives
Dowd, Measuring Market Risk, 2nd Edition.

Chapter 14...
Explain the role of liquidity in crisis situations and discuss approaches to estimating crisis liquidity risk.
Chapter 16...
Define model risk.
Incorrect model specification
Incorrect model application
Implementation risk
Incorrect calibration
Programming and data problems
to help meet both sets of requirements.

Philippe Carrel, The Handbook of Risk Management (West Sussex, UK: John Wiley & Sons, Ltd, 2010).
Chapter 16 .
Explain liquidity risk, internal balance, and asset liability management (ALM).
Understand the internal and external sources of liquidity risk.
Chapter 17
Define the liquidation value of assets and cost of liquidity risk.
Explain market depth and over-the-counter markets as they relate to liquidity.
Chapter 18
Describe the systematic cost of liquidity of a given bank within an interbank market.
Explain liquidity risk measurement with respect to the concentration of root-risk factors.
Understand risk concentration measurement and benchmarking.
Discuss counterparty related and regulatory-driven liquidity risk.
Chapter 19
Describe the liquidity risk management framework including streams and their interactions.
Understand the funding strategies and liquidity tactics to mirror the corporate risk profile.
Brian Nocco and Ren Stulz, Enterprise Risk Management: Theory and Practice, Journal of Applied Corporate
Finance 18, No. 4 (2006): 8-20. Copy available at: www.GARPDigitalLibrary.org
Explain how implementing ERM practices and policies create shareholder value both at the macro and the micro level.
Mo Chaudhury, A review of the key issues in operational risk capital modeling, The Journal of Operational Risk,
Volume 5/Number 3, Fall 2010: pp. 37-66.
Discuss the loss distribution approach to measuring operational risk.
Discuss issues related to external and internal operational loss data sets.
Discuss how frequency and severity distributions of operational losses are obtained.
Discuss how a loss distribution is obtained from frequency and severity distributions.
Eric Cope, Giulio Mignola, Gianluca Antonini and Roberto Ugoccioni, Challenges and pitfalls in measuring
operational risk from loss data, The Journal of Operational Risk, Volume 4/Number 4, Winter 2009/10: pp. 3-27.
Discuss the nature of operational loss distributions.
Discuss the consequences of working with heavy tailed loss data.
Patrick De Fontnouvelle, Eric S. Rosengren and John S. Jordan, 2006. Implications of Alternative Operational
Risk Modeling Techniques. Ch. 10 in Mark Carey and Ren Stulz (eds.), Risks of Financial Institutions, NBER,
475-505. And comment by Andrew Kuritzkes 505-511.
Describe the properties of distributions of operational loss data.
Give a descriptive analysis of operational loss data.
Describe ways to fit distributions to operational loss data.
Carry out a threshold analysis of operational loss data.
Describe how the aggregate loss distribution is developed.
Darrell Duffie, 2010. Failure Mechanics of Dealer Banks. Journal of Economic Perspectives 24:1, 51-72.
Candidates, after completing this reading, should be able to:
Describe the major functions of large dealer banks and explain the firm-specific and systemic risk factors attendant to each.
Discuss various factors that can precipitate or accelerate a liquidity crisis at a dealer bank and what prudent risk management steps can be taken to mit
Readings for Basel Reference
Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework
Comprehensive Version (Basel Committee on Banking Supervision Publication, June 2006).
Supervisory review
Market discipline
Describe and contrast the major elementsincluding a description of the risks coveredof the two options available for the calculation of market risk:
Capital ratio
Capital charge
Risk weights and risk-weighted assets
Maturity (M)
Stress tests
Concentration risk
Residual risk
Basel III: A global regulatory framework for more resilient banks and banking systems (Basel Committee on
Banking Supervision Publication, December 2010). Copy available at: www.GARPDigitalLibrary.org
Discuss reasons for the changes implemented through the Basel III framework.
Risk coverage, the use of stress tests, the treatment of counter-party risk with credit valuations adjustments the use of external ratings, and the use of l
Discuss changes designed to dampen the procyclical amplification of financial shocks and to promote countercyclical buffers.
Describe changes intended to improve the management of
, net stable funding ratios, and the use of monitoring metrics.
Basel III: International framework for liquidity risk measurement, standards and monitoring (Basel Committee
on Banking Supervision Publication, December 2010). Copy available at: www.GARPDigitalLibrary.org
Define and discuss the minimum liquidity coverage ratio.
Define and discuss the net stable funding ratio.
Define and discuss practical applications of prescribed liquidity monitoring tools, including:
Contractual maturity mismatch
Concentration of funding
Available unencumbered assets
Liquidity coverage ratio by significant currency
Market related monitoring tools
apital calculation.
g the incremental risk charge.
Revisions to the Basel II market risk framework- final version (Basel Committee on Banking Supervision
Publication, July 2009). Copy available at: www.GARPDigitalLibrary.org
Explain the relationship regulators require between market risk factors used for pricing versus those used for calculating Value-at-Risk and the risks cap
Explain and calculate the stressed Value-at-Risk measure and the frequency which it must be calculated.
Developments in Modelling Risk Aggregation (Basel Committee on Banking Supervision Publication, July 2009).
Describe frameworks for risk aggregation.
Describe risk aggregation methods within regulatory frameworks.
Describe approaches of validation and management of models in risk aggregation.
Describe diversification effects in risk aggregation.
Grinold and Kahn, Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and
Controlling Risk, 2nd Edition. (New York: McGraw-Hill, 2000).
Chapter 14...
Discuss practical issues in portfolio construction such as determination of risk aversion, incorporation of specific risk aversion, and proper alpha coverag
Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time horizon:
Discuss the optimal no-trade region for rebalancing with transaction costs.
Screens
Stratification
Linear programming
Quadratic programming
hypothesis for active management.

hmetic average return for a portfolio.
ction, adjustments for heteroskedasticity and autocorrelation, inclusion of benchmark timing and style analysis, and controlling for size and value.
and active benchmark timing return.

Eugene Fama and Kenneth French, 2004. The Capital Asset Pricing Model: Theory and Evidence, Journal of
Economic Perspectives 18:3, 25-46.
Explain the logic of the CAPM.
Describe empirical tests of the CAPM and their conclusions.
Describe explanations for the results of the empirical tests of CAPM.
Explain the market proxy problem.
Chapter 7 ...
Explain the difference between risk management and portfolio management, and demonstrate how to use marginal VaR in portfolio management.
Chapter 17...
Discuss the impact horizon, turnover and leverage have on the risk management process in the investment management industry.
Define and describe the following types of risk:
Absolute risk
Relative risk
Policy-mix risk
Active management risk
Funding risk
Sponsor risk
Describe the risk budgeting process across asset classes and active managers:
Define tracking error and information ratio.
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium
Chapter 17...
Comparison of performance with expectations
Return attribution
Metrics such as Sharpe and information ratios
Comparisons with benchmark portfolios and peer groups
gies including:
Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 9th Edition (New York: McGraw-Hill, 2010).
Chapter 24
Differentiate between the time-weighted and dollar-weighted returns of a portfolio and their appropriate uses.
Describe the different risk-adjusted performance measures, such as:
Sharpes measure
Treynors measure
Jensens measure
Information ratio
Describe the uses for the Modigliani-squared and Treynors measure in comparing two portfolios, and the graphical representation of these measures.
Describe the statistical significance of a performance measure using standard error and the t-statistic.
Explain the difficulties in measuring the performances of hedge funds.
Explain how portfolios with dynamic risk levels can affect the use of the Sharpe ratio to measure performance.
Describe techniques to measure the market timing ability of fund managers with:
Regression
A call option model
Describe style analysis.
Describe the asset allocation decision.
David P. Stowell, An Introduction to Investment Banks, Hedge Funds, and Private Equity (Academic Press, 2010).
Chapter 11
Describe the common characteristics attributed to hedge funds, and how they differentiate from standard mutual funds.
Explain the investment strategies used by hedge funds to generate returns.
Discuss how hedge funds grew in popularity and their sub-sequent slowdown in 2008.
Explain the fee structure for hedge funds, and the use of high-water marks and hurdle rates.
Discuss the academic research on hedge fund performance.
Explain how hedge funds helped progress the financial markets.
Discuss the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets.
Compare hedge funds to private equity and mutual funds.
Describe what fund of funds are and provide arguments for and against using them as an investment vehicle.
Chapter 12
Describe equity-based strategies of hedge funds and their associated:
Execution mechanics
Return sources and costs
Summarize how macro strategies are used to generate returns by hedge funds.
Explain the common arbitrage strategies of hedge funds, including:
Fixed income-based arbitrage
Convertible arbitrage
Relative value arbitrage
Describe the mechanics of an arbitrage strategy using an example.
Discuss event-driven strategies, including:
Activism
Merger arbitrage
Distressed securities
Explain the mechanics involved in event-driven arbitrage, including their upside benefits and downside risks.
Describe a numerical example of:
A merger arbitrage
Pairs trading
Distressed investing
A global macro strategy
Chapter 16
Describe and differentiate between major types of private equity investment activities.
Describe the basic structure of a private equity fund and its sources and uses of cash.
Describe private equity funds of funds and the secondary markets for private equity.
Describe the key characteristics of a private equity transaction.
Identify the key participants in a private equity transaction and the roles they play.
Identify and describe methods of funding private equity transactions.
Identify issues related to the interaction between private equity firms and the management of target companies.
Describe typical ways of capitalizing a private equity portfolio company.
Describe the potential impact of private equity transactions, including leveraged recapitalizations, on target companies.
Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz, Trust and Delegation, May 28, 2010.
Explain how past regulatory and legal problems with hedge fund reporting relates to expected future operational events.
Greg N. Gregoriou and Franciois-Serge Lhatant, Madoff: A Riot of Red Flags, December, 2008.
Discuss Bernard Madoff Investment Securities (BMIS) and its business lines.
Explain what is a split-strike conversion strategy.
Describe the returns reported on Madoffs feeder funds.
Explain how the securities fraud at BMIS was caught.
Discuss the operational red flags at BMIS conflicting with the investment professions standard practices.
Discuss investment red flags that demonstrated inconsistencies in BMIS investment style.
Amir E. Khandani and Andrew W. Lo, An Empirical Analysis of Hedge Funds, Mutual Funds, and U.S. Equity
Portfolios, June 24, 2009. Copy available at: www.GARPDigitalLibrary.org
Describe how asset return autocorrelation can be used as a measure of the assets liquidity.
Explain the process of estimating the risk premium associated with illiquidity (illiquidity premia) using autocorrelations.
Compare illiquidity premia across hedge funds, mutual funds and U.S equity portfolios.
Discuss time series properties of illiquidity premia.
Andrew W. Lo, Risk Management for Hedge Funds: Introduction and Overview, Financial Analysts Journal,
Vol. 57., No. 6 (Nov.-Dec., 2001), pp. 16-33.
Describe how the phase-locking phenomenon and nonlinearities in hedge fund returns can be incorporated into risk models.
Leslie Rahl (editor), Risk Budgeting: A New Approach to Investing (London: Risk Books, 2004).
Chapter 6 ...
Michelle McCarthy
Identify practices that can decrease the validity of a VaR measure and discuss considerations for maintaining a quality VaR measure.
Compare and contrast risk budgeting with traditional means of measuring and controlling risk including: (i) asset allocation, (ii) investment guidelines, (

loss in confidence on the part of banks.
agers of the past and the types of perverse behavior they can induce.
the banking system.
f the instruments of prudential supervision.
measuring and monitoring tools.
national trade and capital flows, and political policies.

he opacity of markets and collateralization.
Gregory Connor, Thomas Flavin, and Brian OKelly, The U.S. and Irish Credit Crises: Their Distinctive Differences
and Common Features. Copy available at: www.GARPDigitalLibrary.org
Describe similarities and differences between the U.S. and Irish crisis.
Describe how investor and market sentiment can lead to asset price inflation and bubbles.
Differentiate between rational and irrational exuberance.
Describe the different role capital flows played in the U.S. and Irish crises.
Describe the role of regulators in the U.S. and Irish crises.
Describe moral hazard and the role it played in the U.S. and Irish crises.
Currency Trading Losses Submitted by Promontory Financial Group and Wachtell, Lipton, Rosen & Katz
(March 12, 2002).
Understand the factual background surrounding the AIB/Allfirst structure, Treasury and foreign exchange trading.
Understand John M. Rusnaks role and his subsequent fraud, its discovery, and the magnitude of related losses.
Explain the control deficiencies at Allfirst Treasury that made Mr. Rusnak fraud possible.
Explain the missed opportunities to detect the fraud, why the loss was not uncovered, and why it was able to grow, with specific regard to risk, regulato
Describe recommendations for improving the control environment at AIB/Allfirst.
mmonly employed to mitigate it.
nsation practices.
the evolution of compensation practices.
d their associated risks.
s used for internal controls and those used for reporting .
Gary Gorton, Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007+, (May 9, 2009).
Describe the functions of banks and explain why the banking system is vulnerable to panics.
Define informationally-insensitive debt and provide examples of such debt.
Describe the central features of the National Banking Era panics and discuss the causes of panics.
Explain the function of and define repos, and discuss their use as the primary mechanism driving shadow banking.
Explain how the shock from the subprime mortgage collapse affected asset classes that were unrelated and evolved into the 2007 banking system pani
Explain what the quiet period of U.S. banking system was and discuss what regulations should be adopted that will take into consideration the shadow
IMF, Global Financial Stability Report (Summary Version), (September 2011).

Chapter 3
Describe the monitoring and policy tools for the U.S., U.K., and EU Macroprudential Authorities.
Describe the effectiveness of various techniques to identify indicators of systemic risk (i.e. the three shocks and three lessons).
Understand the three methods (Event Study, Noise-to-Signal Ratio, and Receiver Operating Characteristic (ROC)) for analyzing credit aggregates to pr
Describe how policy instruments can be applied to manage systemic risk.
Examine how various risk sources affect the usefulness of countercyclical capital buffers.
Explain the guidelines for monitoring systemic risk and operationalizing macroprudential policies.
Arthur M. Berd (editor), Lessons From the Financial Crisis (London: Risk Books, 2010).
Chapter 4
Describe the severity of the banking crisis, the currency crisis, and the public debt crisis.
Identify the early warning indicators of the financial crisis.
Explain how entities downplayed the true riskiness of banks business models.
Describe the asset composition and quality of banks balance sheets.
Understand how banks funded their risky business models before and after the 2006 mini-crisis.
Chapter 9
Describe the bottom-up and top-down pricing approaches and their respective issues.
Understand design characteristics of instruments and their effects on supply and demand.
Identify factors that affect the level of liquidity for new instruments.
Explain the challenges of estimating counterparty risk effects for new instruments.
Describe risk modelling and risk management issues when introducing instruments.
Chapter 20
Describe the role played by liquidity, leverage, asset correlation, and model risk in the recent crisis and possible ways to better manage them in the futu
Explain the importance of managing tail risk in a portfolio and describe methods for doing so.
Identify problems with traditional valuation models and asset class diversification assumptions when applied to tail risk and tail risk hedging.
Describe issues related to estimated probabilities relevant to tail risk management.
to the pricing of options on the underlying asset.
on prices and implied volatility.
ect and the price effect.

ting asset liability techniques.
rate exposure profile.
ome securities.
ncome securities.
ments of the mortgages underlying the MBS.
ortgage strips.
features and performance of a subprime loan.
arty, and discuss considerations for applying such a model to various market instruments.
transaction has credit exposure.

he CVA, and systematic/idiosyncratic components.
ment methods, payments to the protection seller, reference name, ownership, recovery rights, trigger events, accrued interest and liquidity.
f specific investor demands.
ese exposures.
nd interpretability.
s and cash flows.
bt security using the credit spread.

quity, and the risk of default.
for regulatory purposes.
ment steps can be taken to mitigate these risks.
he calculation of market risk:
ternal ratings, and the use of leverage ratios

Value-at-Risk and the risks captured by the Value-at-Risk model.
sion, and proper alpha coverage.
in portfolio management.
sentation of these measures.
on, (ii) investment guidelines, (iii) standard deviation, (iv) beta, and (v) duration.
specific regard to risk, regulatory, and operational practices.
the 2007 banking system panic.
nto consideration the shadow banking system.
lyzing credit aggregates to predict a financial crisis and interpret their results.
etter manage them in the future.
nd tail risk hedging.

2013 Reading #
28.1
28.2
29.1
29.2
29.3
29.4
30
31.1
31.2
32.1
32.2
32.3
32.4
33.1
33.2
33.3
34
35
36.1
36.2
36.3
36.4
37
38.1
38.2
38.3
38.4
39.1
39.2
39.3
39.4
39.5
40
41
42
43.1
43.2
44.1
44.2
45
46
47
48
49
51
52
53
54
55
56
57
58
59.1
59.2
60
61.1
61.2
62.1
62.2
62.3
63
65
66
64
67
68
69
70
71
72
2013 AIMS
Chapter 19...............................Volatility SmilesChapter 19...............................Volatility Smiles

Define volatility smile and volatility skew. Define volatility smile and volatility skew.
Explain how put-call parity indicates that the implied volatility used to price call options is the same used to pric
Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying ass
Explain why foreign exchange rates are not necessarily lognormally distributed and the implications this can have
Describe the volatility smile for equity options and give possible explanations for its shape.
Chapter 25 ..............................Exotic OptionsChapter 25 ..............................Exotic Options

Identify and describe how various option characteristics can transform standard American options into nonstan
Identify and describe the characteristics and pay-off structure of:
Compound options
Binary options
Lookback options
Shout options
Asian options
Exchange options
Rainbow options
Basket options
Tuckman, Fixed Income Securities, 3rd Edition.Tuckman, Fixed Income Securities, 3rd Edition.
Chapter 7 ................................The Science of Term Structure Models
Calculate the expected discounted value of a zero-coupon security using a binomial tree.
Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating port
Explain why a call option on a zero-coupon security cannot be properly priced using expected discounted value
Explain the role of up-state and down-state probabilities in the valuation of a call option on a zero-coupon secur
Explain the difference between true and risk-neutral probabilities, and apply this difference to interest rate drift.
Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over mu
Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the riskneutral probabi
Describe the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives
Explain why the BlackScholesMerton model used in valuing equity derivatives is not appropriate to value deriv
Chapter 8 ................................The Evolution of Short Rates and the Shape of the Term Structure
Explain the role of interest rate expectations in determining the shape of the term structure.
Apply a risk-neutral interest rate tree to assess the effect of volatility on the shape of the term structure.
Calculate the convexity effect using Jensens inequality.
Calculate the price and return of a zero coupon bond incorporating a risk premium.
Chapter 9 ................................The Art of Term Structure Models: Drift
Describe the process and effectiveness of the following models, and construct a tree for a short-term rate using
A model with normally distributed rates and no drift (Model 1)
A model incorporating drift (Model 2) A model incorporating drift (Model 2)
Calculate the short-term rate change and standard deviation of the change of the rate using a model with normall
Describe methods for handling negative short-term rates for term structure models.
Describe the process of and construct a tree for a short-term rate under the Ho-Lee Model with timedependent d
Describe uses and benefits of the arbitrage-free models and assess the issue of fitting models to market prices
Describe the process of and construct a simple and recombining tree for a short-term rate under the Vasicek M
Calculate the Vasicek Model rate change, standard deviation of the change of the rate, expected rate in T years,
Describe the effectiveness of the Vasicek Model Describe the effectiveness of the Vasicek Model
Chapter 10...............................The Art of Term Structure Models: Volatility and Distribution

Describe the short-term rate process under a model with time-dependent volatility (Model 3).
Calculate the short-term rate change and describe the behavior of the standard deviation of the change of the ra
Describe the effectiveness of time-dependent volatility models.
Describe the short-term rate process under the Cox-Ingersoll-Ross (CIR) and Lognormal models.
Calculate the short-term rate change and describe the basis point volatility using the CIR and Lognormal model
Summarize the application of a lognormal model with deterministic drift and a lognormal model with mean rever
Chapter 8 ................................Basics of Residential Mortgage Backed Securities
Differentiate between agency and non-agency MBS and describe the major participants in the residential MBS
Describe the impact on a MBS of the weighted average maturity, the weighted average coupon, and the speed
Describe the effective duration and effective convexity of standard MBS instruments and the factors that affect
Describe collateralized mortgage obligations (CMOs) and contrast them with MBSs.
Describe and work through a simple cash flow example for the following types of MBS:
Pass-through securities Pass-through securities Pass-through securities Pass-through securities
Interest only and principal only strips Interest only and principal only strips
Chapter 6 ................................Backtesting VaRChapter 6 ................................Backtesting VaR
Define and identify type I and type II errors. Define and identify type I and type II errors.
Describe the Basel rules for backtesting. Describe the Basel rules for backtesting.
Chapter 11................................VaR MappingChapter 11................................VaR Mapping

Describe how mapping of risk factors can support stress testing.
Describe the method of mapping forwards, commodity forwards, forward rate agreements, and interest rate sw
Describe the method of mapping options. Describe the method of mapping options.
Kevin Dowd, Measuring Market Risk, 2nd Edition.Kevin Dowd, Measuring Market Risk, 2nd Edition.
Chapter 3 ................................Estimating Market Risk Measures
Calculate VaR using a historical simulation approach. Calculate VaR using a historical simulation approach.
Calculate VaR using a parametric estimation approach assuming that the return distribution is either normal or
Calculate the expected shortfall given P/L or return data.
Define coherent risk measures. Define coherent risk measures. Define coherent risk measures.
Chapter 4 ................................Non-parametric Approaches


Age-weighted historic simulation Age-weighted historic simulation Age-weighted historic simulation
Volatility-weighted historic simulation Volatility-weighted historic simulation
Correlation-weighted historic simulation Correlation-weighted historic simulation
Filtered historical simulation Filtered historical simulation Filtered historical simulation
Describe the advantages and disadvantages of non-parametric estimation methods.
Chapter 5 ................................AppendixModeling Dependence: Correlations and Copulas

Identify basic examples of copulas. Identify basic examples of copulas. Identify basic examples of copulas.
Explain how tail dependence can be investigated using copulas
Chapter 7 ................................Parametric Approaches (II): Extreme Value

Describe the peaks-over-threshold (POT) approach. Describe the peaks-over-threshold (POT) approach.
Compare generalized extreme value and POT. Compare generalized extreme value and POT.
Frank Fabozzi, Anand Bhattacharya, William Berliner, Mortgage-Backed Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011).
Chapter 1 .................................Overview of Mortgages and the Consumer Mortgage Market
Describe the key attributes that define mortgages. Describe the key attributes that define mortgages.
Calculate the mortgage payment factor. Calculate the mortgage payment factor.
Explain credit and default risk analysis of mortgages, including metrics for delinquencies, defaults, and loss seve
Chapter 2 ................................Overview of the Mortgage-Backed Securities Market

Describe the evolution of the MBS market. Describe the evolution of the MBS market.
Explain the creation of agency (fixed rate and adjustable rate) and private-label MBS pools, pass-throughs, C
Explain how a loan progresses from application to agency pooling.
Describe MBS market structure and the ways that fixed rate pass-through securities trade.
Compare the pricing of mortgage products to developments in MBS markets.
Chapter 10...............................Techniques for Valuing MBS
Calculate the static cash flow yield of a MBS using bond equivalent yield (BEY) and determine the associated
Define reinvestment risk. Define reinvestment risk. Define reinvestment risk. Define reinvestment risk.
Describe the steps in valuing a mortgage security using Monte Carlo methodology.
Explain how to select the number of interest rate paths in Monte Carlo analysis.
Describe total return analysis, calculate total return, and understand factors present in more sophisticated mode
Identify limitations of the nominal spread, Z-spread, OAS, and total return measures.
Messages from the Academic Literature on Risk Measurement for the Trading Book, Basel Committee on Banki
Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition o
Describe exogenous and endogenous liquidity risk and explain how they might be integrated into VaR models in
Assess VaR, Expected Shortfall, Spectral, and other identified risk measures.
Summarize the recent state of stress testing research and practice.
Compare unified versus compartmentalized risk measurement.
Assess the results of research on top-down and bottom-up risk aggregation methods.
Explain intermediary balance sheet management and the cyclical feedback loop from VaR constraints on levera
Adam Ashcroft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal Re
Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution o
Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical bo
Describe the credit ratings process with respect to subprime mortgage backed securities.
Explain the implications of credit ratings on the emergence of subprime related mortgage backed securities.
Describe the relationship between the credit ratings cycle and the housing cycle.
Explain the implications of the subprime mortgage meltdown on the management of portfolios.
Compare the difference between predatory lending and borrowing.
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital and Risk (Hoboken, NJ: John
Chapter 12...............................Credit Derivatives and Credit-Linked Notes

Describe the mechanics of a single named credit default swap (CDS), and describe particular aspects of CDSs su
Describe portfolio credit default swaps, including basket CDS, Nth to Default CDS, Senior and Subordinated B
Describe the composition and use of iTraxx CDS indices.

Chapter 13...............................The Structuring ProcessChapter 13...............................The Structuring Process

Describe the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and sa
Define and describe the process of tranching and subordination, and describe the role of loss distributions and credit ratings.
Chapter 16...............................SecuritizationChapter 16...............................Securitization
Analyze the differences in the mechanics of issuing securitized products using a trust vs. special purpose entity
Describe the various types of internal and external credit enhancements and interpret a simple numerical exam
Explain the impact liquidity, interest rate and currency risk has on a securitized structure, and list securities t
Describe the securitization process for mortgage backed securities and asset backed commercial paper.
Chapter 17...............................Cash Collateralized Debt Obligations
Define collateralized debt obligations (CDO) and describe the motivations of CDO buyers and sellers.
Describe the types of collateral used in CDOs. Describe the types of collateral used in CDOs.
Describe cash flow vs. market value CDOs. Describe cash flow vs. market value CDOs.
Describe static vs. managed portfolios of CDOs. Describe static vs. managed portfolios of CDOs.
de Servigny and Renault, Measuring and Managing Credit Risk.

Chapter 3 ................................Default Risk: Quantitative Methodologies
Describe the Merton model for corporate security pricing, including its assumptions, strengths and weaknesses
Using the Merton model, calculate the value of a firms debt and equity and the volatility of firm value
Describe the results and practical implications of empirical studies that use the Merton model to value debt
Describe the Moodys KMV Credit Monitor Model to estimate probability of default using equity prices, and c
Describe credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibility, trans
Linear discriminant analysis Linear discriminant analysis Linear discriminant analysis
Parametric discrimination Parametric discrimination Parametric discrimination Parametric discrimination
K nearest neighbor approach K nearest neighbor approach K nearest neighbor approach
Support vector machines Support vector machines Support vector machines Support vector machines
Define and differentiate the following decision rules: minimum error, minimum risk, Neyman-Pearson and Minim
Identify the problems and tradeoffs between classification and prediction models of performance.
Describe important factors in the choice of a particular class of model.
Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 201
Chapter 6 ................................Credit and Counterparty Risk
Describe securities with different types of credit risks, such as corporate debt, sovereign debt, credit derivative
Differentiate between book and market values for a firms capital structure.
Identify and describe different debt seniorities and their respective collateral structure.
Describe common frictions that arise during the creation of credit contracts.
Define the following terms related to default and recovery: default events, probability of default, credit exposure
Calculate expected loss from recovery rates, the loss given default, and the probability of default.
Differentiate between a credit risk event and a market risk event for marketable securities.
Summarize credit assessment techniques such as credit ratings and rating migrations, internal ratings, and ris
Define counterparty risk, describe its different aspects and explain how it is mitigated.
Describe how counterparty risk is different from credit risk.
Describe the Merton Model, and use it to calculate the value of a firm, the values of a firms debt and equity, and
Explain the drawbacks and assess possible improvements to the Merton Model, and identify proprietary models
Describe credit factor models and evaluate an example of a single-factor model.
Define Credit VaR (Value-at-Risk). Define Credit VaR (Value-at-Risk). Define Credit VaR (Value-at-Risk).
Chapter 7 ................................Spread Risk and Default Intensity Models

Define the different ways of representing spreads. Compare and differentiate between the different spread co
Define and compute the Spread 01. Define and compute the Spread 01.
Explain how default risk for a single company can be modeled as a Bernoulli trial.
Explain the relationship between exponential and Poisson distributions.
Define the hazard rate and use it to define probability functions for default time and conditional default probabilit
Calculate risk-neutral default rates from spreads. Calculate risk-neutral default rates from spreads.
Describe advantages of using the CDS market to estimate hazard rates.
Explain how a CDS spread can be used to derive a hazard rate curve.
Construct a hazard rate curve from a CDS spread curve.
Construct a default distribution curve from a hazard rate curve.
Explain how the default distribution is affected by the sloping of the spread curve.
Define spread risk and its measurement using the mark-to-market and spread volatility.
Chapter 8 ................................Portfolio Credit RiskChapter 8 ................................Portfolio Credit Risk

Define default correlation for credit portfolios. Define default correlation for credit portfolios.
Identify drawbacks in using the correlation-based credit portfolio framework.
Assess the effects of correlation on a credit portfolio and its Credit VaR.
Describe how a single factor model can be used to measure conditional default probabilities given economic he
Compute the variance of the conditional default distribution and the conditional probability of default using a si
Explain the relationship between the default correlation among firms and their single-factor model beta paramet
Explain how Credit VaR of a portfolio is calculated using the single-factor model, and how correlation affects the
Describe how Credit VaR can be calculated using a simulation of joint defaults with a copula.
Chapter 9 ................................Structured Credit RiskChapter 9 ................................Structured Credit Risk

Identify common types of structured products and the various dimensions that are important to their value and s
Describe the role of capital structure and credit losses in a securitization.
Evaluate a waterfall example in a securitization with multiple tranches.
Identify the key participants in a securitization, and describe some conflicts of interest that can arise in the proc
Evaluate one or two iterations of interim cashflows in a three tiered securitization structure including the final
Describe a simulation approach to calculating credit losses for different tranches in a securitization of a portfolio
Explain how the probability of default and default correlation among the underlying assets of a securitization affects the value, losses and
Define and describe how default sensitivities for tranches are measured.
Define and describe how default sensitivities for tranches are measured.
Summarize some of the different types of risks that play a role in structured products.
Define implied correlation and describe how it can be measured.
Identify the motivations for using structured credit products.
Jon Gregory, Counterparty Credit Risk: The New Challenge for Global Financial Markets (West Sussex, UK: Joh
Chapter 2 ................................Defining Counterparty Credit Risk
Define counterparty risk and explain how it differs from lending risk.
Identify types of transactions that carry counterparty risk.

Explain some ways in which counterparty risk can be mitigated.
Define the following terminology related to counterparty risk: credit exposure, credit migration, recovery, mar
Describe the different ways institutions can manage counterparty risk.
Describe the drawbacks of relying on triple-A rated, too-big-to-fail institutions as a method of managing counte
Summarize how counterparty risk is quantified and briefly describe credit value adjustment (CVA).
Summarize how counterparty risk is hedged and explain important factors in assessing capital requirements for
Define the following metrics for credit exposure: expected mark-to-market, expected exposure, potential futu
Chapter 3 ................................Mitigating Counterparty Credit Risk

Differentiate between a two-way and one-way agreement, and explain the purpose of an ISDA master agreemen
Identify types of default-remote entities and describe problems associated with the assumption that they are in
Describe how termination and walkaway features work in credit contracts.
Describe netting and close-out procedures (including multilateral netting), explain their advantages and disad
Describe the effectiveness of netting in reducing exposure based on correlation between contract mark-tomarke
Describe the effect of netting on exposure metrics. Describe the effect of netting on exposure metrics.
Describe collateralization and explain the mechanics of the collateralization process, including the role of a valua
Describe the following features of collateralization agreements: links to credit quality, margins and call frequen
Chapter 4 ................................Quantifying Counterparty Credit Exposure, I

Explain the following techniques used to quantify credit exposure: add-ons, semi-analytical methods, and Monte
Describe the Monte Carlo simulation technique for quantifying exposure, and explain the choice of risk hotspot
Identify typical exposure profiles for the following security types: loans, bonds, repos, swaps, FX, options, and c
Explain how payment frequencies and exercise dates affect the exposure profiles of securities.
Explain the difference between risk-neutral and real probability measures in the context of how they are used i
Describe the parameters used in simple single-factor models of the following security types: equities, FX, commo
Describe how netting is modeled. Describe how netting is modeled. Describe how netting is modeled.
Define and calculate the netting factor. Define and calculate the netting factor.
Define and calculate marginal expected exposure and the effect of correlation on total exposure.
Chapter 5 ................................Quantifying Counterparty Credit Exposure, II: The Impact of Collateral
Calculate the expected exposure and potential future exposure over the remargining period given normal distri
Describe the assumptions and parameters involved in modeling collateral.
Identify the impact that each factor of collateral modeling has on the exposure profile, starting from a simple case
Explain the relevant risks involved as a result of entering into a collateral agreement.
Chapter 7 ................................Pricing Counterparty Credit Risk, I

Explain the motivation of pricing counterparty risk. Explain the motivation of pricing counterparty risk.
Define and calculate credit value adjustment (CVA) when no wrong-way risk is present.
Describe the process of approximating the CVA spread.
Define and calculate the incremental CVA and the marginal CVA.
Describe how collateralization and netting affect the CVA price.
Explain challenges in pricing CVA arising from the presence of exotic products and the issue of path dependenc
Define and calculate CVA and CVA spread in the presence of a bilateral contract.
Explain issues that need to be considered in pricing bilateral CVA.
Ren Stulz, Risk Management & Derivatives (Florence, KY: Thomson South-Western, 2002).
Chapter 18...............................Credit Risks and Credit Derivatives
Explain, from a contingent claim perspective, the impact stochastic interest rates have on the valuation of risky b
Assess the credit risks of derivatives. Assess the credit risks of derivatives.
Describe the fundamental differences between CreditRisk+, CreditMetrics and KMV credit portfolio models.
Define a vulnerable option, and explain how credit risk can be incorporated in determining the options value.
Explain how to account for credit risk exposure in valuing a swap.
Chapter 14...............................Capital Allocation and Performance Measurement
Describe the RAROC (risk-adjusted return on capital) methodology and describe some of the potential benefits o
Compute and interpret the RAROC for a loan or loan portfolio, and use RAROC to compare business unit perf
Range of Practices and Issues in Economic Capital Frameworks, (Basel Committee on Banking Supervision Pub
Defining risk measures Defining risk measures Defining risk measures Defining risk measures
Risk aggregation Risk aggregation Risk aggregation Risk aggregation Risk aggregation Risk aggregation
Validation of models Validation of models Validation of models Validation of models Validation of models
Dependency modeling in credit risk Dependency modeling in credit risk Dependency modeling in credit risk
Evaluating counterparty credit risk Evaluating counterparty credit risk Evaluating counterparty credit risk
Assessing interest rate risk in the banking book Assessing interest rate risk in the banking book
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not
Describe the constraints imposed and the opportunities offered by economic capital within the following areas:
Credit portfolio management Credit portfolio management Credit portfolio management
Risk based pricing Risk based pricing Risk based pricing Risk based pricing Risk based pricing
Customer profitability analysis Customer profitability analysis Customer profitability analysis
Management incentives Management incentives Management incentives Management incentives
Dowd, Measuring Market Risk, 2nd Edition.Dowd, Measuring Market Risk, 2nd Edition.
Chapter 14...............................Estimating Liquidity Risks
Discuss the bid-ask spread as a measure of liquidity. Discuss the bid-ask spread as a measure of liquidity.
Define exogenous and endogenous liquidity. Define exogenous and endogenous liquidity.
Describe Endogenous Price approaches to LVaR, its motivation and limitations.
Explain the relationship between liquidation strategies, transaction costs and market price impact.
Describe liquidity at risk (LaR) and describe the factors that affect future cash flows.
Explain the role of liquidity in crisis situations and describe approaches to estimating crisis liquidity risk.
Chapter 16...............................Model RiskChapter 16...............................Model Risk

Define model risk; identify and describe sources of model risk.
Describe the challenges involved with quantifying model risk.
Summarize the role of senior managers in managing model risk.
Explain the function of an independent risk oversight (IRO) unit.
Malz, Financial Risk Management: Models, History, and Institutions.

Chapter 11, Section 1.1...........Assessing the Quality of Risk Measures
Describe ways that errors can be introduced into models.
Describe the types of horizon, computational and modeling decisions which could result in variability of VaR es
Identify challenges related to mapping of risk factors to positions in making VaR calculations.
Explain how improper mapping can understate specific risks such as basis or liquidity risk.
Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe
Identify the two major defects in model assumptions which led to the underestimation of systematic risk for re
Chapter 12...............................Liquidity and LeverageChapter 12...............................Liquidity and Leverage
Define and differentiate between sources of liquidity risk, including transactions liquidity risk, balance sheet/fund
Summarize the process by which a fractional-reserve bank engages in asset liability management.
Describe issues related to systematic funding liquidity risk with respect to LBOs, merger arbitrage hedge funds
Explain specific liquidity issues faced by money market mutual funds.
Describe the economics of the collateral market and explain the mechanics of the following transactions using co
Calculate a firms leverage ratio, describe the formula for the leverage effect, and explain the relationship betw
Compute a firms leverage and construct a firms balance sheet given the following types of transactions: purchas
Identify the main sources of transactions liquidity risk. Identify the main sources of transactions liquidity risk.
Calculate the expected transactions cost and the 99 percent spread risk factor for a transaction.
Calculate the liquidity-adjusted VaR for a position to be liquidated over a number of trading days.
Define characteristics used to measure market liquidity, including tightness, depth and resiliency.
Explain the challenges posed by liquidity constraints on hedge funds during times of financial distress, with a
Define enterprise risk management (ERM). Define enterprise risk management (ERM).
Explain how implementing ERM practices and policies create shareholder value both at the macro and the micro
Explain how an ERM program can be used to determine the right amount of risk.
Describe the development and implementation of an ERM system.
Explain the relationship between economic value and accounting performance.
Distinguish between regulatory and economic capital. Distinguish between regulatory and economic capital.
Explain the use of economic capital in the corporate decision making process
Mo Chaudhury, A Review of the Key Issues in Operational Risk Capital Modeling, The Journal of Operational R
Describe the loss distribution approach to measuring operational risk.
Identify issues related to external and internal operational loss data sets.
Explain how frequency and severity distributions of operational losses are obtained.
Describe how a loss distribution is obtained from frequency and severity distributions.
Eric Cope, Giulio Mignola, Gianluca Antonini and Roberto Ugoccioni, Challenges and Pitfalls in Measuring Oper
Describe the nature of operational loss distributions. Describe the nature of operational loss distributions.
Explain the consequences of working with heavy tailed loss data.
Describe methods of extrapolating beyond the data. Describe methods of extrapolating beyond the data.
Explain the challenges in validating capital models. Explain the challenges in validating capital models.
Darrell Duffie, 2010. Failure Mechanics of Dealer Banks. Journal of Economic Perspectives 24:1, 51-72.
Describe the major functions of large dealer banks and explain the firm-specific and systemic risk factors atten
Explain how diseconomies of scope in risk management and corporate governance may arise in large dealer b
Identify factors that can precipitate or accelerate a liquidity crisis at a dealer bank and what prudent risk mana
Compare a liquidity crisis at a dealer bank to a traditional bank run.

Describe policy measures that could alleviate some of the firm-specific and systemic risks related to large deal
Principles for the Sound Management of Operational Risk, (Basel Committee on Banking Supervision
Publication, June 2011).Publication, June 2011).Publication, June 2011).Publication, June 2011).
Describe the three lines of defense in the Basel model for operational risk governance.
Define and describe the corporate operational risk function (CORF) and compare and contrast the structure and
Summarize the eleven fundamental principles of operational risk management as suggested by the Basel comm
Evaluate the role of the Board of Directors as well as senior management in implementing an effective operati
Describe the elements of a framework for operational risk management, including documentation requirements.
Identify examples of tools which can be used to identify and assess operational risk.
Describe features of an effective control environment and identify specific controls which should be in place to
Evaluate the Basel committees suggestions for managing technology risk and outsourcing risk.
Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, Senior Supervisors Group
Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefi
Describe best practices for a firms Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Direc
Explain the role of a RAF in managing the risk of individual business lines within a firm.
Identify metrics which can be monitored as part of an effective RAF and describe the classes of metrics to be
Explain the benefits to a firm from having a robust risk data infrastructure, and describe key elements of an effe
Describe factors which could lead to poor or fragmented IT infrastructure at an organization.
Explain the challenges and best practices related to data aggregation at an organization.
Til Schuermann. Stress Testing Banks, April 2012.Til Schuermann. Stress Testing Banks, April 2012.
Explain the differences in the features and scope of stress tests before and after the Supervisory Capital As
Describe the problem of coherence in modeling risk factors during the stress testing of banks.
Describe the challenges in mapping from broader macroeconomic factors to specific intermediate risk factors i
Explain the challenges in modeling a bank's balance sheet over a stress test horizon period.
Compare and contrast the 2009 SCAP stress test, the 2011 and 2012 CCAR, and the 2011 EBA Irish and EBA Eu
Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework Co
Minimum capital requirements Minimum capital requirements Minimum capital requirements
Supervisory review Supervisory review Supervisory review Supervisory review Supervisory review
Market discipline Market discipline Market discipline Market discipline Market discipline Market discipline
Standardised Approach Standardised Approach Standardised Approach Standardised Approach
Foundation IRB Approach Foundation IRB Approach Foundation IRB Approach Foundation IRB Approach
Advanced IRB Approach Advanced IRB Approach Advanced IRB Approach Advanced IRB Approach
Basic Indicator Approach Basic Indicator Approach Basic Indicator Approach Basic Indicator Approach
Standardised Approach Standardised Approach Standardised Approach Standardised Approach
Advanced Measurement Approach Advanced Measurement Approach Advanced Measurement Approach
Describe and contrast the major elementsincluding a description of the risks coveredof the two options availa
Standardised Measurement Method Standardised Measurement Method
Internal Models Approach Internal Models Approach Internal Models Approach Internal Models Approach
Capital ratio Capital ratio Capital ratio Capital ratio Capital ratio Capital ratio Capital ratio Capital ratio
Capital charge Capital charge Capital charge Capital charge Capital charge Capital charge
Risk weights and risk-weighted assets Risk weights and risk-weighted assets
Tier 1 capital and its components Tier 1 capital and its components Tier 1 capital and its components
Probability of default (PD) Probability of default (PD) Probability of default (PD) Probability of default (PD)
Loss given default (LGD) Loss given default (LGD) Loss given default (LGD) Loss given default (LGD)
Exposure at default (EAD) Exposure at default (EAD) Exposure at default (EAD) Exposure at default (EAD)
Maturity (M) Maturity (M) Maturity (M) Maturity (M) Maturity (M) Maturity (M) Maturity (M) Maturity (M)
Stress tests Stress tests Stress tests Stress tests Stress tests Stress tests Stress tests Stress tests
Concentration risk Concentration risk Concentration risk Concentration risk Concentration risk
Residual risk
Basel III: A Global Regulatory Framework for More Resilient Banks and Banking SystemsRevised Version, (Basel Committee on Banking
Describe reasons for the changes implemented through the Basel III framework.
Risk coverage, the use of stress tests, the treatment of counter-party risk with credit valuations adjustments the
Explain changes designed to dampen the procyclical amplification of financial shocks and to promote countercyc
Describe changes intended to improve the management of liquidity risk including liquidity coverage ratios, net s
Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring, (Basel Committe
on Banking Supervision Publication, December 2010).on Banking Supervision Publication, December 2010).
Define and describe the minimum liquidity coverage ratio.
Define and describe the net stable funding ratio. Define and describe the net stable funding ratio.
Define and describe practical applications of prescribed liquidity monitoring tools, including:
Contractual maturity mismatch Contractual maturity mismatch Contractual maturity mismatch
Concentration of funding Concentration of funding Concentration of funding Concentration of funding
Available unencumbered assets Available unencumbered assets Available unencumbered assets
Liquidity coverage ratio by significant currency Liquidity coverage ratio by significant currency
Market related monitoring tools Market related monitoring tools Market related monitoring tools
Revisions to the Basel II Market Risk FrameworkUpdated as of 31 December 2010, (Basel Committee on Banking Supervision Publication
Explain the relationship regulators require between market risk factors used for pricing versus those used for c
Explain and calculate the stressed Value-at-Risk measure and the frequency which it must be calculated.
Describe the regulatory guidance on prudent valuation of illiquid positions
Operational RiskSupervisory Guidelines for the Advanced Measurement Approaches, (Basel Committee on Ba
Define gross loss and net loss and identify which specific items should be included or excluded in gross loss
Describe the process and considerations suggested by the Basel committee for a bank to use in determining a l
Describe the four data elements which are required to compute a banks operational risk capital charge per t
Define an operational risk management framework (ORMF) and an operational risk measurement system (ORM
Describe key guidelines for verification and validation of a banks ORMF and ORMS.
Describe key supervisory guidelines for the selection of a reference date for an internal loss.
Describe key guidelines for the selection of a banks Operational Risk Categories (ORCs).
Explain key guidelines for modeling the distribution of individual ORCs, including the selection of thresholds, nec
Nadine Gatzert, Hannah Wesker, A Comparative Assessment of Basel II/III and Solvency II, Working Paper,
Friedrich-Alexander-University of Erlangen-Nuremberg, Version: October 2011.
Contrast the use of VaR parameters and confidence intervals in the Basel II/III and the Solvency II frameworks.
Explain the difference between classes of risks taken into account in Basel II/III and Solvency II.
Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR), and des
Explain the difference between the Basel II/III and the Solvency II frameworks for the capture of diversification b
Explain the difference between Basel II/III and the Solvency II frameworks with respect to: 1) risk classes and c
Compare and contrast the Basel II/III and Solvency II frameworks with respect to qualitative risk management
Describe the key differences between Basel II/III and Solvency II with respect to public disclosure.
Richard Grinold and Ronald Kahn, Active Portfolio Management: A Quantitative Approach for Producing Superior
Chapter 14...............................Portfolio ConstructionChapter 14...............................Portfolio Construction
Identify the inputs to the portfolio construction process.
Describe the motivation and methods for refining alphas in the implementation process.
Describe the implications of transaction costs on portfolio construction.
Explain practical issues in portfolio construction such as determination of risk aversion, incorporation of specif
Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time h
Describe the optimal no-trade region for rebalancing with transaction costs.
Screens Screens Screens Screens Screens Screens Screens Screens Screens Screens Screens
Stratification Stratification Stratification Stratification Stratification Stratification Stratification Stratification
Linear programming Linear programming Linear programming Linear programming Linear programming
Quadratic programming Quadratic programming Quadratic programming Quadratic programming
Describe dispersion, explain its causes and describe methods for controlling forms of dispersion.
Chapter 7 ................................Portfolio Risk: Analytical Methods
Explain the role of correlation has on portfolio risk. Explain the role of correlation has on portfolio risk.
Explain the difference between risk management and portfolio management, and demonstrate how to use marg
Chapter 17...............................VaR and Risk Budgeting in Investment Management

Define risk budgeting. Define risk budgeting. Define risk budgeting. Define risk budgeting.
Describe the impact of horizon, turnover and leverage on the risk management process in the investment mana
Define and describe the following types of risk: absolute risk, relative risk, policy-mix risk, active management r
Describe how VaR can be used to check compliance, monitor risk budgets and reverse engineer sources of risk
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Appro
Chapter 17...............................Risk Monitoring and Performance Measurement
Identify sources of risk consciousness within an organization.
Describe the objectives of a risk management unit in an investment management firm.
Explain the importance of liquidity considerations for a portfolio.
Describe the objectives of performance measurement. Describe the objectives of performance measurement.
Describe common features of a performance measurement framework
Chapter 13...............................Empirical Evidence on Security Returns
Interpret the expected return-beta relationship implied in the CAPM, and describe the methodologies for estimati
Describe the two-stage procedure employed in early tests of the CAPM and explain the concerns related to these
Describe and interpret Rolls critique to the CAPM, as well as expansions of Rolls critique.
Describe the methodologies for correcting measurement error in beta, and explain historical test results of the
Explain the test of the single-index models that accounts for human capital, cyclical variations and nontraded b
Summarize the tests of multifactor CAPM and APT. Summarize the tests of multifactor CAPM and APT.
Describe and interpret the Fama-French three-factor model, and explain historical test results related to this mo
Summarize different models used to measure the impact of liquidity on asset pricing and asset returns.
Explain the equity premium puzzle and describe the different explanations to this observation.
Chapter 24..............................Portfolio Performance Evaluation
Differentiate between the time-weighted and dollar-weighted returns of a portfolio and their appropriate uses.
Describe the different risk-adjusted performance measures, such as Sharpes measure, Treynors measure, Jen
Describe the uses for the Modigliani-squared and Treynors measure in comparing two portfolios, and the graph
Describe the statistical significance of a performance measure using standard error and the t-statistic.
Explain the difficulties in measuring the performances of hedge funds.
Explain how portfolios with dynamic risk levels can affect the use of the Sharpe ratio to measure performance.
Describe techniques to measure the market timing ability of fund managers with a regression and with a call op
Describe style analysis. Describe style analysis. Describe style analysis. Describe style analysis.
Describe the asset allocation decision. Describe the asset allocation decision.
David P. Stowell, An Introduction to Investment Banks, Hedge Funds, and Private Equity (Academic Press, 2010)
Chapter 11................................Overview of Hedge Funds
Describe the common characteristics attributed to hedge funds, and how they differentiate from standard mutua
Explain the investment strategies used by hedge funds to generate returns.
Describe how hedge funds grew in popularity and their sub-sequent slowdown in 2008.
Explain the fee structure for hedge funds, and the use of high-water marks and hurdle rates.
Assess academic research on hedge fund performance.
Explain how hedge funds helped progress the financial markets.
Describe the liquidity of hedge fund investments and the usage of lock-ups, gates and side pockets.
Compare hedge funds to private equity and mutual funds.
Describe funds of funds and provide arguments for and against using them as an investment vehicle.
Chapter 12...............................Hedge Fund Investment Strategies

Describe equity-based strategies of hedge funds and their associated execution mechanics, return sources and
Summarize how macro strategies are used to generate returns by hedge funds.
Explain the common arbitrage strategies of hedge funds, including fixed-income-based arbitrage, convertible arb
Describe the mechanics of an arbitrage strategy using an example.
Describe event-driven strategies, including activism, merger arbitrage and distressed securities.
Explain the mechanics involved in event-driven arbitrage, including their upside benefits and downside risks.
Describe and interpret a numerical example of the following strategies: merger arbitrage, pairs trading, distres
Chapter 16...............................Overview of Private Equity

Describe and differentiate between major types of private equity investment activities.
Describe the basic structure of a private equity fund and its sources and uses of cash.
Describe private equity funds of funds and the secondary markets for private equity.
Describe the key characteristics of a private equity transaction.
Identify the key participants in a private equity transaction and the roles they play.
Identify and describe methods of funding private equity transactions.
Identify issues related to the interaction between private equity firms and the management of target companies.
Describe typical ways of capitalizing a private equity portfolio company.
Describe the potential impact of private equity transactions, including leveraged recapitalizations, on target co
G. Constantinides, M. Harris and R. Stulz. eds., Handbook of the Economics of Finance, Volume 2B (Oxford: Else
Chapter 17...............................Hedge Funds, by William Fung and David Hsieh
Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual
Explain the evolution of the hedge fund industry and describe landmark events which precipitated major change
Describe the different hedge fund strategies, explain their return characteristics, and describe the inherent risks
Describe the historical performance trend of hedge funds compared to equity indices, and evaluate statistical evi
Describe the market events which resulted in a convergence of risk factors for different hedge fund strategies, a
Describe the problem of risk sharing asymmetry between principals and agents in the hedge fund industry.
Explain the impact of institutional investors on the hedge fund industry and assess reasons for the trend tow
Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz, Trust and Delegation, May 28, 2010.
Explain how past regulatory and legal problems with hedge fund reporting relates to expected future operationa
Greg N. Gregoriou and Franois-Serge Lhabitant, Madoff: A Riot of Red Flags, December, 2008.
Describe Bernard Madoff Investment Securities (BMIS) and its business lines.
Explain what is a split-strike conversion strategy. Explain what is a split-strike conversion strategy.
Describe the returns reported on Madoffs feeder funds.
Explain how the securities fraud at BMIS was caught. Explain how the securities fraud at BMIS was caught.
Describe the operational red flags at BMIS conflicting with the investment professions standard practices.
Describe investment red flags that demonstrated inconsistencies in BMIS investment style.
Vol. 57., No. 6 (Nov to Dec, 2001), pp. 16-33.Vol. 57., No. 6 (Nov to Dec, 2001), pp. 16-33.
Describe how the phase-locking phenomenon and nonlinearities in hedge fund returns can be incorporated into

Jaime Caruana and Stefan Avdjiev, Sovereign Creditworthiness and Financial Stability: An International
Perspective. Banque de France Financial Stability Review, No. 16 (April 2012), pp. 71-85.
Explain three key initial conditions that helped spread of the economic crisis globally among sovereigns.
Describe three ways in which the financial sector risks are transmitted to sovereigns.
Describe five ways in which sovereign risks are transmitted to the financial sector.
Summarize the activity of banks and sovereigns in the European Union during the 2002-2007 period leading up
Summarize the activity of banks and sovereigns in the European Union during the economic crisis.
Describe how risks were transmitted among banks and sovereigns in the European Union during the economic cr
Describe the economic condition of the European financial sector in 2012, and explain some possible policy impl
Li Lian Ong and Martin ihk, Of Runes and Sagas: Perspectives on Liquidity Stress Testing Using an Iceland
Example. IMF Working Paper WP/10/156, July 2010Example. IMF Working Paper WP/10/156, July 2010
Summarize the events of the Icelandic debt crisis. Summarize the events of the Icelandic debt crisis.
Describe the typical solvency and liquidity scenarios present at Icelandic banks in the periods leading up to the
Explain how the weighting of shocks in short-term assets and short-term liabilities are adjusted in stress tests tha
Contrast the stress test methods of the Financial Supervisory Authority (FME) and Sedlabanki, and compare thei
Describe several ways to improve the management of solvency risk at banks.
Andrew G. Haldane and Benjamin Nelson, Tails of the Unexpected. Speech from The Credit Crisis Five Years
Unpacking the Crisis Conference at the University of Edinburgh (Bank of England, June 8 2012.)
Summarize the history of normality in physical, social, and economic systems.
Describe the evidence of fat tails, the implications of fat tails, and explanations for fat tails.
Identify examples of system-based interactions that can lead to fat tails.
Describe non-normality in regards to asset pricing and risk management tools.
Andrew G. Haldane and Vasileios Madouros, The Dog and the Frisbee. Speech from the Federal Reserve Bank
Kansas Citys 36th Economic Policy Symposium (Bank of England, August 31 2012).
Describe heuristics and explain why using heuristic rules can be an optimal response to a complex environment
Describe the advantages and disadvantages of using simple versus complex rules in a decision making proces
Describe ideal conditions and situations where simple decision making strategies can outperform complex rule
Summarize the evolution of regulatory structures and regulatory responses to financial crises, and explain critici
Compare the effectiveness of simple and complex capital weighting structures in predicting bank failure given s
Compare the results provided by simple and complex statistical models in estimating asset returns and portfolio
Describe possible solutions to manage or reduce complexity in a regulatory framework.
Gerald Rosenfield, Jay Lorsch, Rakesh Khurana (eds.), Challenges to Business in the Twenty-First Century,
(Cambridge: American Academy of Arts & Sciences, 2011), Chapter 2, Challenges of Financial Innovation, by
Describe crucial functions of a financial system. Describe crucial functions of a financial system.
Describe how accounting systems and protocols can affect how risk is presented.
Describe significant issues related to risk in the savings market.
Describe the use of hedging versus raising equity capital as it relates to managing risk.
Describe the interaction between speculative behavior and financial innovation.
Ananth Madhavan, Exchange-Traded Funds, Market Structure and the Flash Crash, October 2011.
Describe the chronology of the Flash Crash and the possible triggers for this event discussed in recent researc
Describe the data set, measurements, flags, and multiple regression models used in the study.
Calculate the maximum drawdown, concentration ratio, and the volume and quote Herfindahl index.
Summarize the results of the study including the descriptive statistics, the time series variation in fragmentat
2014 Reading #
38.1
38.2
37.1
37.2
37.3
37.4
39
33
34
32.1
32.2
31.1
31.2
31.3
31.4
40.1
40.2
40.3
35
36
47
41.1
41.2
46.1
46.2
46.3
46.4
42
44.1
44.2
44.3
44.4
45.1
45.2
45.3
45.4
45.5
45.6
45.7
43
52
53
54.1
54.2
55.1
55.2
51
49
50
57
59
48
56
58
60
61
62
63
64
65
66
67.1
67.2
68
70
69
71
72
73
74
75
76
77
78
79
2014 AIMS
Chapter 19...............................Volatility Smiles

Explain the implications of put-call parity on the implied volatility of call and put options.
Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying
asset price and to the pricing of options on the underlying asset.
Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied
volatility.
Describe the volatility smile for equity options and foreign currency options and give possible explanations for its
shape.
Chapter 25 ..............................Exotic Options

Describe how standard American options can be transformed into nonstandard American options.
Identify and describe the characteristics and pay-off structure of the following exotic options: forward start,
compound, chooser, barrier, binary, lookback, shout, Asian, exchange, rainbow, and basket options.
Bruce Tuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011).
Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating
portfolios.
Explain why a call option on a zero-coupon security cannot be properly priced using expected discounted
values.
Explain the role of up-state and down-state probabilities in the valuation of a call option on a zero-coupon
security.
Explain the difference between true and risk-neutral probabilities, and apply this difference to interest rate drift.
Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over
multiple periods.
Describe the rationale behind the use of recombining trees in option pricing.
Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the risk-neutral
probabilities.
Describe the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives
on fixed income securities.
Explain why the Black-Scholes-Merton model is not appropriate to value derivatives on fixed income securities.
Calculate the convexity effect using Jensen's inequality.

Construct and describe the effectiveness of a short term interest rate tree assuming normally distributed rates,
both with and without drift.
Calculate the short-term rate change and standard deviation of the rate change using a model with normally
distributed rates and no drift.
Describe methods for addressing the possibility of negative short-term rates in term structure models.
Describe the process of and construct a short-term rate tree under the Ho-Lee Model with time-dependent drift.
Describe uses and benefits of the arbitrage-free models and assess the issue of fitting models to market prices.
Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek
Model with mean reversion.
Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and
half life.
Describe the effectiveness of the Vasicek Model.

Describe the short-term rate process under a model with time-dependent volatility.
Calculate the short-term rate change and describe the behavior of the standard deviation of the rate change
using a model with time dependent volatility.
Describe the effectiveness of time-dependent volatility models.
Describe the short-term rate process under the Cox-Ingersoll-Ross (CIR) and lognormal models.
Calculate the short-term rate change and describe the basis point volatility using the CIR and lognormal models.
Describe lognormal models with deterministic drift and mean reversion.
Chapter 8 ................................Basics of Residential Mortgage Backed Securities
Differentiate between agency and non-agency MBS and describe the major participants in the residential MBS
market.
Describe the impact on a MBS of the weighted average maturity, the weighted average coupon, and the speed
of prepayments of the mortgages underlying the MBS.
Describe the effective duration and effective convexity of standard MBS instruments and the factors that affect
them.
Describe collateralized mortgage obligations (CMOs) and contrast them with MBS.
Describe and work through a simple cash flow example for the following types of MBS:
Pass-through securities
Interest only and principal only strips
Jacob Boudoukh, Matthew Richardson and Robert F. Whitelaw, The Best of Both Worlds: A Hybrid Approach
to Calculating Value at Risk, Stern School of Business, NYU.
Describe the existing approaches to VaR measurement and their advantages and disadvantages.
Describe the process of implementing the hybrid approach.
Calculate VaR using the historical simulation and hybrid approaches on the same data set.
Explain the characteristics that are desirable for VaR estimates.
Summarize the study results using the various VaR measurement approaches.
John Hull and Alan White, Incorporating Volatility Updating into the Historical Simulation Method for
Value at Risk, Journal of Risk, October 1998.
Explain the model building approach to calculating VaR.
Describe the Hull and White (HW) and the Boudoukh, Richardson and Whitelaw (BRW) approaches and their
advantages and disadvantages.
Describe the mean absolute percentage error (MAPE) measure and capital utilization ratio.
Summarize the study results using the historical simulation, BRW, and HW VaR approaches.
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition.
(New York: McGraw Hill, 2007)
Chapter 6 ................................Backtesting VaR
Describe the process of model verification based on exceptions or failure rates.
Chapter 11................................VaR Mapping

Explain the principles underlying VaR mapping, and describe the mapping process.
Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.
Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: John Wiley & Sons, 2005)
Calculate VaR using a historical simulation approach.
Calculate VaR using a parametric estimation approach assuming that the return distribution is either normal or
lognormal.

Describe the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical simulation
approaches.
Chapter 5 ................................AppendixModeling Dependence: Correlations and Copulas

Chapter 7 ................................Parametric Approaches (II): Extreme Value

Explain the importance and challenges of extreme values in risk management.
Explain the tradeoffs involved in setting the threshold level when applying the GP distribution.
Frank Fabozzi, Anand Bhattacharya, William Berliner, Mortgage-Backed Securities, 3rd Edition
(Hoboken, NJ: John Wiley & Sons, 2011)
Chapter 1 .................................Overview of Mortgages and the Consumer Mortgage Market
Describe the key characteristics of mortgages.
Explain credit and default risk analysis of mortgages, including metrics for delinquencies, defaults, and loss
severity.
Chapter 2 ................................Overview of the Mortgage-Backed Securities Market

Describe the evolution of the MBS market.
Explain the creation of agency (fixed rate and adjustable rate) and private-label MBS pools, pass-throughs,
CMOs, and mortgage strips.
Explain how a loan progresses from application to agency pooling.
Describe MBS market structure and the ways that fixed rate pass-through securities trade.
Compare the pricing of mortgage products to developments in MBS markets.
Chapter 10...............................Techniques for Valuing MBS
Describe static cash flow yield analysis of MBS, including bond-equivalent yield, nominal spread and Z-spread.
Calculate the static cash flow yield of a MBS using bond equivalent yield, as well as the nominal spread and Z-
spread.
Describe reinvestment risk.
Describe the steps in valuing a mortgage security using binomial and Monte Carlo methodology.
Describe considerations in selecting the number of interest rate paths in Monte Carlo analysis.
Calculate total return, describe total return analysis, and understand factors present in simple and complex
return models.
Identify limitations of the nominal spread, Z-spread, OAS, and total return measures.
Messages from the Academic Literature on Risk Measurement for the Trading Book, Basel Committee on
Banking Supervision, Working Paper, No. 19, Jan 2011.
Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition
of time varying volatility in VaR risk factors, and VaR backtesting.
Describe exogenous and endogenous liquidity risk and explain how they might be integrated into VaR models.
Compare VaR, expected shortfall, and other relevant risk measures.
Compare unified and compartmentalized risk measurement.
Describe the results of research on "top-down" and "bottom-up" risk aggregation methods.
Explain intermediary balance sheet management and the cyclical feedback loop caused by VaR constraints on
leveraged investors
John Hull and Alan White, LIBOR vs. OIS: The Derivatives Discounting Dilemma, April 2013. Forthcoming in the
Journal of Investment Management.
Describe Overnight Indexed Swaps (OIS) and explain the characteristics of the OIS rate which could make it
preferable to use as a risk-free rate.
Describe the relationship between the OIS rate, the federal funds rate, and LIBOR.
Explain criticisms of the use of LIBOR as a risk free rate for valuing non-collateralized portfolios.
Describe the Collateral Rate Adjustment (CRA) in a collateralized portfolio and explain how the CRA is
calculated when cash and non-cash collateral are present.
Compare the use of the OIS rate and LIBOR as a risk free rate in valuing collateralized portfolios.
Adam Ashcroft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal
Reserve Bank of New York Staff Reports, no. 318, (March 2008).*
Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of
each factor to the subprime mortgage problems.
Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical
borrower and the features and performance of a subprime loan.
Explain the implications of the subprime mortgage meltdown on portfolio management.
Compare predatory lending and borrowing.
Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook (Hoboken, NJ: John Wiley & Sons,
2013).
Chapter 1 .................................The Credit Decision
Define credit risk and explain how it arises using examples.
Explain the components of credit risk evaluation.
Compare and contrast quantitative and qualitative techniques of credit risk evaluation.
Compare the credit analysis of consumers, corporations, financial institutions, and sovereigns.
Describe quantitative measurements and factors of credit risk, including probability of default, loss given default,
exposure at default, expected loss, and time horizon,
Describe and compare bank failure and a bank insolvency.
Chapter 2 ................................The Credit Analyst

Describe, compare and contrast various credit analyst roles.
Describe common tasks performed by a banking credit analyst.
Describe the quantitative, qualitative, and research skills a banking credit analyst is expected to have.
Describe the various sources of information used by a credit analyst.
Describe the mechanics and attributes of a single named credit default swap (CDS).
Describe the mechanics and attributes of portfolio CDS.
Describe the composition and use of CDS indices.
Describe the mechanics and attributes of asset default swaps, equity default swaps, total return swaps and
credit linked notes.
Chapter 13...............................The Structuring Process

Describe the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and
satisfaction of specific investor demands.
Explain the steps involved and the various participants in the structuring process.
Describe the role of loss distributions and credit ratings in the structuring process.
Chapter 16...............................Securitization
Define securitization, describe the securitization process and explain the role of participants in the process.
Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose
entity.
Describe and assess the various types of internal and external credit enhancements.
Explain the impact of liquidity, interest rate and currency risk on a securitized structure, and identify securities
that hedge these exposures.
Describe the securitization process for mortgage backed securities and asset backed commercial paper.
Describe collateralized debt obligations (CDOs) and explain the motivations of CDO buyers and sellers.
Describe the types of collateral used in CDOs.
Explain the structure and benefits of balance sheet CDOs and arbitrage CDOs, and the motivations for using
them.
Compare cash flow and market value CDOs.
Compare static and managed portfolios of CDOs.
de Servigny and Renault, Measuring and Managing Credit Risk

Using the Merton model, calculate the value of a firms debt and equity and the volatility of firm value
Describe the results and practical implications of empirical studies that use the Merton model to value debt
Describe key qualities of credit scoring models.
Compare the following quantitative methodologies for credit analysis and scoring: linear discriminant analysis,
parametric discrimination, K nearest neighbor approach, and support vector machines.
Differentiate between the following decision rules: minimum error, minimum risk, Neyman-Pearson and Minimax.
Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons,
2011).
Describe the credit risks associated with different types of securities.
Differentiate between book and market values in a firms capital structure.
Describe common frictions that arise with the use of credit contracts.
Explain the following concepts related to default and recovery: default events, probability of default, credit
exposure, and loss given default.
Summarize credit assessment techniques such as credit ratings and rating migrations, internal ratings, and risk
models.
Describe counterparty risk, compare counterparty risk to credit risk, and explain how counterparty risk can be
mitigated.
Describe the Merton Model, and use it to calculate the value of a firm, the values of a firms debt and equity, and
default probabilities.
Explain the drawbacks of and assess possible improvements to the Merton Model.
Define and calculate Credit VaR.

Compare the different ways of representing credit spreads.
Compute one credit spread given others when possible.
Define and compute the Spread 01.
Define the hazard rate and use it to define probability functions for default time and conditional default
probabilities.
Calculate risk-neutral default rates from spreads.
Define spread risk and its measurement using the mark-to-market and spread volatility.
Chapter 8 ................................Portfolio Credit Risk

Define default correlation for credit portfolios.
Assess the impact of correlation on a credit portfolio and its Credit VaR.
Describe the use of a single factor model to measure portfolio credit risk, including the impact of correlation.
Describe how Credit VaR can be calculated using a simulation of joint defaults with a copula.
Chapter 9 ................................Structured Credit Risk

Describe common types of structured products.
Describe tranching and the distribution of credit losses in a securitization.
Describe a waterfall structure in a securitization.
Identify the key participants in the securitization process, and describe conflicts of interest that can arise in the
process.
Evaluate one or two iterations of interim cashflows in a three tiered securitization structure.
Describe a simulation approach to calculating credit losses for different tranches in a securitization.
Explain how the default probabilities and default correlations affect the credit risk in a securitization.
Explain how default sensitivities for tranches are measured.
Describe risk factors that impact structured products.
Identify the motivations for using structured credit products.
Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial
Markets, 2nd Edition (West Sussex, UK: John Wiley & Sons, 2012).
Describe counterparty risk and explain how it differs from lending risk.
Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each
transaction.
Identify and describe institutions that take on significant counterparty risk.
Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss
given default and the recovery rate.
Identify and describe the different ways institutions can manage and mitigate counterparty risk.
Chapter 4 ................................Netting, Compression, Resets, and Termination Features

Explain the purpose of an ISDA master agreement.
Summarize netting and close-out procedures (including multilateral netting), explain their advantages and
disadvantages, and describe how they fit into the framework of the ISDA master agreement.
Describe the effectiveness of netting in reducing credit exposure under various scenarios.
Describe the mechanics of termination provisions and explain their advantages and disadvantages.
Chapter 5 ................................Collateral
Describe features of a credit support annex (CSA) within the ISDA Master Agreement.
Describe the role of a valuation agent.
Describe types of collateral that are typically used.
Explain the process for the reconciliation of collateral disputes.
Explain the features of a collateralization agreement.
Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be
linked to credit quality.
Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through
collateralization.
Chapter 8. ...............................Credit Exposure
Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure,
potential future exposure, expected positive exposure and negative exposure, effective exposure, and maximum
exposure.
Compare the characterization of credit exposure to VaR methods and describe additional considerations used in
the determination of credit exposure.
Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on
exposure.
Identify typical credit exposure profiles for various derivative contracts and combination profiles.
Explain how payment frequencies and exercise dates affect the exposure profile of various securities.
Explain the impact of netting on exposure, the benefit of correlation, and calculate the netting factor.
Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period.
Explain the difference between risk-neutral and real-world parameters, and describe their use in assessing risk.
Chapter 10...............................Default Probability, Credit Spreads, and Credit Derivatives

Explain the difference between cumulative and marginal default probabilities.
Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default
probabilities in pricing derivative contracts.
Explain the various approaches for estimating price: historical data approach, equity based approach, and risk
neutral approach.
Describe how recovery rates may be estimated.
Describe credit default swaps (CDS) and their general underlying mechanics.
Describe the credit spread curve and explain the motivation for curve mapping.
Describe types of portfolio credit derivatives.
Describe index tranches, super senior risk, and collateralized debt obligations (CDO).
Chapter 12...............................Credit Value Adjustment

Explain the motivation for and the challenges of pricing counterparty risk.
Describe credit value adjustment (CVA).
Calculate CVA and the CVA spread with no wrong-way risk, netting, or collateralization.
Explain the impact of changes in the credit spread and recovery rate assumptions on CVA.
Explain how netting can be incorporated into the CVA calculation.
Define and calculate incremental CVA and marginal CVA, and explain how to convert CVA into a running spread.
Explain the impact of incorporating collateralization into the CVA calculation.
Chapter 15...............................Wrong Way Risk

Describe wrong-way risk and contrast it with right-way risk.
Identify examples of wrong-way risk and examples of right-way risk.
Ren Stulz, Risk Management & Derivatives (Florence, KY: Thomson South-Western, 2002)
Explain the relationship between credit spreads, time to maturity, and interest rates.
Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky
bonds, equity, and the risk of default.
Describe a credit derivative, credit default swap, and total return swap.
Describe the RAROC (risk-adjusted return on capital) methodology and its benefits.
Compute and interpret the RAROC for a loan or loan portfolio, and use RAROC to compare business unit
performance.
Range of Practices and Issues in Economic Capital Frameworks, (Basel Committee on Banking Supervision
Publication, March 2009).*
Risk aggregation
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not
designed for regulatory purposes.
Risk based pricing
Management incentives
Explain the bid-ask spread as a measure of liquidity.
Describe and calculate LVaR using the constant spread approach and the exogenous spread approach.
Describe endogenous price approaches to LVaR, their motivation and limitations.
Explain the relationship between liquidation strategies, transaction costs and market price impact.
Describe liquidity at risk (LaR) and describe the factors that affect future cash flows.
Chapter 16...............................Model Risk

Describe the challenges involved with quantifying model risk.

Describe how horizon, computational and modeling decisions can impact VaR estimates.
Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how
such modeling errors could have been avoided.
Identify two major defects in model assumptions which led to the underestimation of systematic risk for
residential mortgage backed securities (RMBS) during the 2008-2009 financial downturn.
Chapter 12...............................Liquidity and Leverage

Define and differentiate between sources of liquidity risk, including transactions liquidity risk, balance sheet/
funding liquidity risk and systemic risk.
Describe issues related to systematic funding liquidity risk with respect to leveraged buyouts, merger arbitrage
hedge funds, and convertible arbitrage hedge funds.
Describe the economics of the collateral market and explain the mechanics of the following transactions using
collateral: margin lending, repos, securities lending, and total return swaps.
Calculate a firm's leverage ratio, describe the formula for the leverage effect, and explain the relationship
between leverage and a firm's return on equity.
Explain the impact on a firms leverage and its balance sheet of the following transactions: purchasing long
equity positions on margin, entering into short sales, and trading in derivatives.
Identify the main sources of transactions liquidity risk.
Explain the challenges posed by liquidity constraints on hedge funds during times of financial distress.
Finance 18, No. 4 (2006): 820.*
Explain how implementing ERM practices and policies can create shareholder value both at the macro and the
micro level.
Explain how an ERM program can be used to determine the right amount of risk.
Mo Chaudhury, A Review of the Key Issues in Operational Risk Capital Modeling, The Journal of Operational
Risk, Volume 5/Number 3, Fall 2010: pp. 37-66.
Describe the loss distribution approach to measuring operational risk.
Identify issues related to external and internal operational loss data sets.
Explain how frequency and severity distributions of operational losses are obtained, including commonly used
distributions.
Describe how a loss distribution is obtained from frequency and severity distributions.
Eric Cope, Giulio Mignola, Gianluca Antonini and Roberto Ugoccioni, Challenges and Pitfalls in Measuring
Operational Risk from Loss Data, The Journal of Operational Risk, Volume 4/Number 4, Winter 2009/10: pp. 3-
27.
Describe the nature of operational loss distributions.
Explain the consequences of working with heavy tailed loss data.
Principles for Effective Data Aggregation and Risk Reporting, (Basel Committee on Banking Supervision
Publication, January 2013).
Explain the potential benefits of having effective risk data aggregation and reporting.
Describe key governance principles related to risk data aggregation and risk reporting practices.
Identify the data architecture and IT infrastructure features that can contribute to effective risk data aggregation
and risk reporting practices.
Describe characteristics of a strong risk data aggregation capability and explain how these characteristics
interact with one another.
Describe characteristics of effective risk reporting practices.
Darrell Duffie, 2010. Failure Mechanics of Dealer Banks. Journal of Economic Perspectives 24:1, 51-72.*
Describe the major functions of large dealer banks and explain the firm-specific and systemic risk factors
associated with each function.
Explain how diseconomies of scope in risk management and corporate governance may arise in large dealer
banks.
Identify factors that can cause a liquidity crisis at a dealer bank and explain how to mitigate these risks.
Describe policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.
Publication, June 2011).*
Describe the three "lines of defense" in the Basel model for operational risk governance.
Define and describe the corporate operational risk function (CORF) and compare and contrast the structure and
responsibilities of the CORF at smaller and larger banks.
Summarize the fundamental principles of operational risk management as suggested by the Basel committee.
Evaluate the role of the Board of Directors and senior management in implementing an effective operational risk
structure per the Basel committee recommendations.
Describe the elements of a framework for operational risk management.
Describe features of an effective control environment and identify specific controls which should be in place to
address operational risk.
Describe the Basel committee's suggestions for managing technology risk and outsourcing risk.
Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, Senior Supervisors Group,
December 2010.*
Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits
to a firm of having a well developed RAF.
Describe best practices for a firms Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of
Directors in the development and implementation of an effective RAF.
Describe the classes of risk metrics to be communicated to managers within the firm.
Explain the benefits to a firm from having a robust risk data infrastructure, and describe key elements of an
effective IT risk management policy at a firm.
Til Schuermann. Stress Testing Banks, April 2012.*

Explain the differences in the features and scope of stress tests before and after the Supervisory Capital
Assessment Program (SCAP).
Describe the problem of coherence in modeling risk factors during the stress testing of banks.
Describe the challenges in mapping broader macroeconomic factors to specific intermediate risk factors to
model losses.
Compare and contrast the 2009 SCAP stress test, the 2011 and 2012 CCAR, and the 2011 EBA Irish and EBA
European stress tests in their methodologies and key findings.
Readings for Regulatory Reference
Comprehensive Version, (Basel Committee on Banking Supervision Publication, June 2006).*
Supervisory review
Market discipline
Describe and contrast the major elementsincluding a description of the risks coveredof the two options
available for the calculation of market risk:
Capital ratio
Capital charge
Maturity (M)
Stress tests
Concentration risk
Residual risk
Basel III: A Global Regulatory Framework for More Resilient Banks and Banking SystemsRevised Version,
(Basel Committee on Banking Supervision Publication, June 2011).*
Risk coverage, the use of stress tests, the treatment of counter-party risk with credit valuation adjustments, the
use of external ratings, and the use of leverage ratios
Explain changes designed to dampen the procyclical amplification of financial shocks and to promote
countercyclical buffers.
Describe changes intended to improve the management of liquidity risk including liquidity coverage ratios, net
stable funding ratios, and the use of monitoring metrics.
Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, (Basel Committee on Banking
Supervision Publication, January 2013).*
Describe the characteristics of high quality liquid assets (HQLA) and operational requirements for assets to
qualify as HQLA.
Differentiate between Level 1, Level 2A, and Level 2B assets, and define the respective cap for each asset class
as a percentage of total HQLA.
Define how total net cash outflows are calculated for the minimum liquidity coverage ratio.
Describe additional metrics to be used by supervisors as monitoring tools when assessing the liquidity risk of a
bank.
Revisions to the Basel II Market Risk FrameworkUpdated as of 31 December 2010, (Basel Committee on
Banking Supervision Publication, February 2011).*
Explain the relationship regulators require between market risk factors used for pricing versus those used for
calculating value-at-risk and the risks captured by the value-at-risk model.
Operational RiskSupervisory Guidelines for the Advanced Measurement Approaches, (Basel Committee on
Banking Supervision Publication, June 2011).*
Define gross loss and net loss and identify which specific items should be included or excluded in gross loss
computations per the Basel committee.
Describe the process and considerations suggested by the Basel committee for a bank to use in determining a
loss data threshold.
Describe the four data elements which are required to compute a bank's operational risk capital charge per the
Basel Committee's AMA framework.
Define an operational risk management framework (ORMF) and an operational risk measurement system
(ORMS) and explain the relationship between a banks ORMF and its ORMS.
Describe key guidelines for verification and validation of a bank's ORMF and ORMS.
Describe key supervisory guidelines for the selection of a reference date for an internal loss.
Describe key guidelines for the selection of a bank's Operational Risk Categories (ORCs).
Explain key guidelines for modeling the distribution of individual ORCs, including the selection of thresholds,
necessary adjustments, and selection of statistical tools and probability distributions.
Nadine Gatzert, Hannah Wesker, A Comparative Assessment of Basel II/III and Solvency II, Working Paper,
Friedrich-Alexander-University of Erlangen-Nuremberg, Version: October 2011.*
Contrast the use of VaR parameters and confidence intervals in the Basel II/III and the Solvency II frameworks.
Explain the difference between classes of risks taken into account in Basel II/III and Solvency II.
Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR), and
describe the repercussions to an insurance company for breaching the SCR and MCR under the Solvency II
framework.
Explain the difference between the Basel II/III and the Solvency II frameworks for the capture of diversification
benefits.
Explain the difference between Basel II/III and the Solvency II frameworks with respect to: 1) risk classes and
capital requirements, 2) risk measure and calibration, 3) time perspective, and 4) valuation.
Compare and contrast the Basel II/III and Solvency II frameworks with respect to qualitative risk management
aspects, including the internal risk management process, governance, and supervision.
Describe the key differences between Basel II/III and Solvency II with respect to public disclosure.
Returns and Controlling Risk, 2nd Edition (New York: McGraw-Hill, 2000).
Chapter 14...............................Portfolio Construction
Identify the inputs to the portfolio construction process.
Describe the motivation and methods for refining alphas in the implementation process.
Explain practical issues in portfolio construction such as determination of risk aversion, incorporation of specific
risk aversion, and proper alpha coverage.
Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time
horizon.
Describe the optimal no-trade region for rebalancing with transaction costs.
Describe strengths and weaknesses of the following portfolio construction techniques:screens, stratification,
linear programming, and quadratic programming.
Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental
VaR, marginal VaR, component VaR, undiversified portfolio VaR, and diversified portfolio VaR.
Explain the role of correlation on portfolio risk.
Apply the concept of marginal VaR to guide decisions about portfolio VaR.
Explain the difference between risk management and portfolio management, and describe how to use marginal
VaR in portfolio management.

Describe the impact of horizon, turnover and leverage on the risk management process in the investment
management industry.
Describe the risk management challenges associated with investments in hedge funds.
Define and describe the following types of risk: absolute risk, relative risk, policy-mix risk, active management
risk, funding risk and sponsor risk.
Explain how VaR can be used in the investment process and the development of investment guidelines.
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium
Describe risk planning, including its objectives, effects and the participants in its development.
Describe risk budgeting and the role of quantitative methods in risk budgeting.
Describe the objectives and actions of a risk management unit in an investment management firm.
Describe how risk monitoring can confirm that investment activities are consistent with expectations.
Describe the objectives of performance measurement.
Describe the common features of performance measurement tools.
Kevin R. Mirabile, Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager
Profits, and Fund Performance (Hoboken, NJ: Wiley Finance, 2013).
Chapter 11................................Performing Due Diligence on Specific Managers and Funds
Identify reasons for the failures of funds in the past.
Explain elements of the due diligence process used to assess investment managers.
Identify themes and questions investors can consider when evaluating a manager.
Describe criteria that can be evaluated in assessing a funds risk management process.
Explain how due diligence can be performed on a funds operational environment.
Explain how a funds business model risk and its fraud risk can be assessed.
Describe elements that can be included as part of a due diligence questionnaire.
Differentiate between time-weighted and dollar-weighted returns of a portfolio and describe their appropriate
uses.
Describe and distinguish between risk-adjusted performance measures, such as Sharpes measure, Treynors
measure, Jensens measure (Jensens alpha), and information ratio.
Describe the uses for the Modigliani-squared and Treynors measure in comparing two portfolios, and the
graphical representation of these measures.
Determine the statistical significance of a performance measure using standard error and the t-statistic.
Explain the difficulties in measuring the performance of hedge funds.
Explain how changes in portfolio risk levels can affect the use of the Sharpe ratio to measure performance.
Describe techniques to measure the market timing ability of fund managers with a regression and with a call
option model.
Describe and apply performance attribution procedures, including the asset allocation decision, sector and
security selection decision and the aggregate contribution.
G. Constantinides, M. Harris and R. Stulz. eds., Handbook of the Economics of Finance, Volume 2B
(Oxford: Elsevier, 2013).
Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual
funds.
Explain biases which are commonly found in databases of hedge funds.
Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes
in the development of the industry.
Evaluate the role of investors in shaping the hedge fund industry.
Explain the relationship between risk and alpha in hedge funds.
Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the
inherent risks of each strategy.
Describe the historical portfolio construction and performance trend of hedge funds compared to equity indices.
Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and
explain the impact of such a convergence on portfolio diversification strategies.
Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing
concentration of assets under management (AUM) in the industry.
Vol. 57., No. 6 (Nov to Dec, 2001), pp. 16-33.*
Compare and contrast the investment perspectives of institutional investors and hedge fund managers.
Explain how proper risk management can be a source of alpha for a hedge fund.
Explain the limitations of VaR in measuring hedge fund risks.
Describe how nonlinearities in hedge fund returns can be incorporated into risk models.
Explain how autocorrelation of returns can be used as a measure of an assets liquidity.
Describe the roles of risk preferences and operational risks in hedge funds.

U.S. House of Representatives Subcommittee Report on MF Global (through p. 75), November 2012.*
Describe the unauthorized trading incident at MF Global and the events leading up to the appointment of Jon
Corzine.
Explain how the risk exposure at MF Global changed during Jon Corzines leadership.
Explain the frictions associated with Corzines requests to increase MF Globals European repurchase-to-
maturity position limits, and the response by risk management and the board of directors to these requests.
Summarize the evolution of MF Global's accounting practices for its European RTM positions, particularly in
capturing the default risk of the RTM positions.
Explain the increasing liquidity demands on MF Global and the companys response to these demands.
Describe the net capital rule and the effects of the capital charge imposed by FINRA, and summarize the events
of the final days of MF Global.
JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and AbusesExecutive Summary, U.S.
Senate
Subcommittee on Investigations, April 2013.*
Summarize the London Whale trades in JP Morgans Structured Credit Portfolio (SCP) between 2008 and mid-
2012 and explain how portfolio size and portfolio risks increased over this period.
Explain how the Chief Investment Office (CIO) changed its method of reporting SCP trades in 2012 and explain
how losses reported by this method differed from the SCPs internally reported losses during that time.
Identify the five key risk metrics used by the CIO and explain how the CIO responded to breaches of these
metrics in the SCP portfolio.
Summarize the deficiencies in risk management practices related to the SCP, including the VaR model change.
Compare how the CIO reported its SCP trading intentions and activity to its regulating authority, the OCC, with
the actual trading activity which took place at the bank.
Explain how investors, regulators, and the public were misinformed about the nature, activities, and riskiness of
the SCP.
"Towards Better Reference Rate Practices: A Central Bank Perspective," Working Group Established by the BIS
Economic Consultative Committee, March 2013.*
Describe the risk components of market interest rates and explain their implications in choosing a proper
reference rate.
Describe recent market trends which have encouraged market participants to consider changing reference
interest rates.
Explain the implications of reference rates on the transmission of monetary policy, including potential challenges.
Explain how the use of reference interest rates can impact the financial stability in a banking system.
Describe characteristics of effective reference rates.
Explain the role of the public sector in the setting and oversight of reference rates, and in encouraging
change and supporting transition to new reference rates when necessary.
OTC Derivatives: A Comparative Analysis of Regulation in the United States, European Union, and Singapore.
(Rajarshi Aroskar, IFM Review of Futures Markets, Volume 21, March 2013).*
Describe the characteristics and benefits of central clearing.
Describe the function of a trade repository and explain the benefits of a trade repository to OTC market
participants.
Compare the regulatory requirements and regulatory authority in the United States, European Union, and
Singapore with respect to: the central clearing of OTC derivatives, requirements of central counterparties, margin
requirements for uncleared OTC derivatives, trading, and backloading of existing OTC contracts.
Describe the requirements for reporting derivative transactions to trade repositories in the United States,
European Union and Singapore.
A New Look at the Role of Sovereign Credit Default Swaps, IMF Global Financial Stability Report, Chapter 2,
April 2013.*
Explain the use of sovereign credit default swaps (SCDS) in hedging, speculating, and basis trading.
Compare the economic factors that determine SCDS spreads with the factors that traditionally influence
government bond spreads.
Explain the mechanics of risk transmission from government bonds to SCDS and vice versa, and discuss
empirical evidence of these transmissions, including the use of the Hasbrouck statistic and volatility
decomposition.
Explain the possible impact of the European Union ban on naked SCDS protection buying on the SCDS market;
explain the motivations for this ban as well as its criticisms.
Explain how the benefit of SCDS central counterparties can address the risks of naked short-selling without the
need to limit short-selling.
Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice,
Board of Governors of the Federal Reserve System, August 2013.*
Describe the Federal Reserves Capital Plan Rule and explain the seven principles of an effective capital
adequacy process for bank holding companies (BHCs) subject to the Capital Plan Rule.
Describe practices which can result in a strong and effective capital adequacy process for a BHC in the following
areas:
Risk identification
Internal controls, including model review and validation
Corporate governance
Capital policy, including setting of goals and targets and contingency planning
Stress testing and stress scenario design
Estimating losses, revenues, and expenses, including quantitative and qualitative methodologies
Assessing the impact of capital adequacy, including RWA and balance sheet projections
Jaime Caruana and Stefan Avdjiev, Sovereign Creditworthiness and Financial Stability: An International
Perspective. Banque de France Financial Stability Review, No. 16 (April 2012), pp. 71-85.*
Explain three key initial conditions that helped spread the economic crisis globally among sovereigns.
Describe three ways in which the financial sector risks are transmitted to sovereigns.
Describe five ways in which sovereign risks are transmitted to the financial sector.
Summarize the activity of banks and sovereigns in the European Union during the 2002-2007 period leading up
to the economic crisis.
Summarize the activity of banks and sovereigns in the European Union during the economic crisis.
Describe how risks were transmitted among banks and sovereigns in the European Union during the economic
crisis, giving specific examples.
Describe the economic condition of the European financial sector in 2012, and explain how policy
implementation can potentially mitigate the spread of future crises.
2015 Reading #
36.1
36.2
36.3
37.1
37.2
38
39.1
39.2
39.3
39.4
40.1
40.2
40.3
40.4
40.5
41.1
41.2
42.1
42.2
43
44
45.1
45.2
45.3
45.4
46.1
46.2
46.3
46.4
46.5
46.6
46.7
47.1
47.2
47.3
47.4
48
49
50
56
51.1
51.2
51.3
52
57
58
59
55
53.1
53.2
54.1
54.2
61
60
62.1
62.2
63
64
65
66
67
68.1
68.2
69
70
71
72
73
74
75
78
77
76
79
80
81
82
2015 Learning Objectives
MARKET RISK MEASUREMENT AND MANAGEMENTPart II Exam Weight | 25%
Calculate VaR using a historical simulation approach.
Calculate VaR using a parametric estimation approach assuming that the return distribution is either normal or lognormal.

Distinguish among the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical simulation approach
Chapter 7 ................................Parametric Approaches (II): Extreme Value [MR3]

Compare and contrast generalized extreme value and POT.
Evaluate the tradeoffs involved in setting the threshold level when applying the GP distribution.
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition. (New York: McGraw Hill, 2007)
Describe the process of model verification based on exceptions or failure rates.

Summarize how to map a fixed income portfolio into positions of standard instruments.
Messages from the Academic Literature on Risk Measurement for the Trading Book, Basel Committee on Banking Supervision, W
19, Jan 2011.
Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varying volati
factors, and VaR backtesting.

Describe the results of research on "top-down" and "bottom-up" risk aggregation methods.
Explain intermediary balance sheet management and the cyclical feedback loop caused by VaR constraints on leveraged investors.
Gunter Meissner, Correlation Risk Modeling and Management, (New York: Wiley, 2014)
Chapter 1. Some Correlation Basics: Properties, Motivation, Terminology
Describe financial correlation risk and the areas in which it appears in finance.
Explain how correlation contributed to the global financial crisis of 2007 to 2009.
Explain the role of correlation risk in market, credit, systemic, and concentration risk.
Chapter 2 .Empirical Properties of Correlation: How Do Correlations Behave in the Real World?
Describe how equity correlations and correlation volatilities behave throughout various economic states.
Calculate a mean reversion rate using standard regression and calculate the corresponding autocorrelation.
Identify the best-fit distribution for equity, bond, and default correlations.
Chapter 3 .Statistical Correlation Models Can We Apply Them to Finance?

Evaluate the limitations of financial modeling with respect to the model itself, calibration of the model, and the models output.
Assess the Pearson correlation approach, Spearmans rank correlation, and Kendalls t, and evaluate their limitations and usefulness in fin
Chapter 4 .Financial Correlation Modeling Bottom-Up Approaches (Sections 4.3.0 (intro), 4.3.1, and 4.3.2 only)
Explain the purpose of copula functions and the translation of the copula equation.
Describe the Gaussian copula and explain how to use it to derive the joint probability of default of two assets.
Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaussian copula.
Chapter 6Empirical Approaches to Risk Metrics and Hedging
Explain the drawbacks to using a DV01-neutral hedge for a bond position.
Describe a regression hedge and explain how it can improve a standard DV01-neutral hedge.
Calculate the regression hedge adjustment factor, beta.
Calculate the face value of an offsetting position needed to carry out a regression hedge.
Calculate the face value of multiple offsetting swap positions needed to carry out a two-variable regression hedge.
Compare and contrast between level and change regressions.
Describe principal component analysis and explain how it is applied in constructing a hedging portfolio.

Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating portfolios.
Explain why a call option on a zero-coupon security cannot be properly priced using expected discounted values.
Explain the role of up-state and down-state probabilities in the valuation of a call option on a zero-coupon security.
Define risk-neutral pricing and apply it to option pricing.
Distinguish between true and risk-neutral probabilities, and apply this difference to interest rate drift.
Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the risk-neutral probabilities.
Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed income securiti
Explain why the Black-Scholes-Merton model is not appropriate to value derivatives on fixed income securities.
Describe the impact of embedded options on the value of fixed income securities
Calculate the convexity effect using Jensen's inequality.

Construct and describe the effectiveness of a short term interest rate tree assuming normally distributed rates, both with and without
Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed rates and no
Construct a short-term rate tree under the Ho-Lee Model with time-dependent drift.
Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with mean reversio
Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and half life.
Describe the effectiveness of the Vasicek Model

Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model with tim
volatility.
Assess the efficacy of time-dependent volatility models.

Chapter 9OIS Discounting, Credit Issues, and Funding Costs
Explain the main considerations in choosing a risk-free rate for derivatives valuation.
Describe the OIS rate and the LIBOR-OIS spread, and explain their uses.
Explain why the OIS rate is a good proxy for the risk-free rate.
Describe how to construct the OIS zero curve, and using it, determine forward LIBOR rates.

Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pr
the underlying asset.
Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volatility.
Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its shape.

Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook (Hoboken, NJ: John Wiley & Sons, 2013).

Describe quantitative measurements and factors of credit risk, including probability of default, loss given default, exposure at default,
time horizon,
Compare bank failure and bank insolvency.

Assess the quality of various sources of information used by a credit analyst

oIllustrate and interpret security-holder payoffs based on the Merton model
oUsing the Merton model, calculate the value of a firms debt and equity and the volatility of firm value
oDescribe the results and practical implications of empirical studies that use the Merton model to value debt
Compare the following quantitative methodologies for credit analysis and scoring: linear discriminant analysis, parametric discriminati
neighbor approach, and support vector machines.
Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equity, and the ris
Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 2011).

Explain the following concepts related to default and recovery: default events, probability of default, credit exposure, and loss given d
Summarize credit assessment techniques such as credit ratings and rating migrations, internal ratings, and risk models.
Describe counterparty risk, compare counterparty risk to credit risk, and explain how counterparty risk can be mitigated.
Describe the Merton Model, and use it to calculate the value of a firm, the values of a firms debt and equity, and default probabilities
Define and calculate Credit VaR

Define the hazard rate and use it to define probability functions for default time and conditional default probabilities.
Define spread risk and its measurement using the mark-to-market and spread volatility
Chapter 8 ................................Portfolio Credit Risk (Sections 8.1, 8.2, 8.3 only)

Define default correlation for credit portfolios.
Describe how Credit VaR can be calculated using a simulation of joint defaults with a copula

Identify the key participants in the securitization process, and describe conflicts of interest that can arise in the process.
Evaluate one or two iterations of interim cashflows in a three tiered securitization structure.

Identify the motivations for using structured credit products
Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Editi
UK: John Wiley & Sons, 2012).
Describe counterparty risk and differentiate it from lending risk.
Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each transaction.
Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default and the
Identify and describe the different ways institutions can manage and mitigate counterparty risk

Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describ
the framework of the ISDA master agreement.
Describe the mechanics of termination provisions and explain their advantages and disadvantages
Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to credit quality.
Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.
Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future expos
positive exposure and negative exposure, effective exposure, and maximum exposure.
Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determination of
Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure.
Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period.

Distinguish between cumulative and marginal default probabilities.
Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default probabilities in pricing derivativ
Compare the various approaches for estimating price: historical data approach, equity based approach, and risk neutral approach.


Evaluate the impact of changes in the credit spread and recovery rate assumptions on CVA.
Explain the impact of incorporating collateralization into the CVA calculation
Describe the mechanics and attributes of a single named credit default swap (CDS).
Describe the mechanics and attributes of portfolio CDS.
Describe the composition and use of CDS indices.
Describe the mechanics and attributes of asset default swaps, equity default swaps, total return swaps and credit linked notes.
Chapter 13...............................The Structuring Process

Describe the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and satisfaction of specific inv
Explain the steps involved and the various participants in the structuring process.
Describe the role of loss distributions and credit ratings in the structuring process.
Chapter 16...............................Securitization
Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose entity.
Describe and assess the various types of internal and external credit enhancements.
Explain the impact of liquidity, interest rate and currency risk on a securitized structure, and identify securities that hedge these expos
Describe the securitization process for mortgage backed securities and asset backed commercial paper

Describe collateralized debt obligations (CDOs) and explain the motivations of CDO buyers and sellers.
Describe the types of collateral used in CDOs.
Explain the structure and benefits of balance sheet CDOs and arbitrage CDOs, and the motivations for using them.
Compare cash flow and market value CDOs.

Compare static and managed portfolios of CDOs.
Adam Ashcroft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal Reserve Bank of New
Reports, no. 318, (March 2008).*
Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of each factor to the subp
problems.
Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower and the feature
of a subprime loan.
Define and describe the corporate operational risk function (CORF) and compare and contrast the structure and responsibilities of the
and larger banks.
Evaluate the role of the Board of Directors and senior management in implementing an effective operational risk structure per the Ba
recommendations.
Describe features of an effective control environment and identify specific controls which should be in place to address operational ris
Brian Nocco and Ren Stulz, Enterprise Risk Management: Theory and Practice, Journal of Applied Corporate Finance 18, No. 4 (2
Explain how implementing ERM practices and policies can create shareholder value both at the macro and the micro level.
Explain how a company can determine its optimal amount of risk through the use of credit rating targets.
Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firms market risk, credit risk an
distributions.
Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, Senior Supervisors Group, December 2010.*
Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits to a firm of having a
Describe best practices for a firms Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors in the development an
of an effective RAF.
Explain the benefits to a firm from having a robust risk data infrastructure, and describe key elements of an effective IT risk managem

Philippa X. Girling, Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework (Hoboken: John W
2013).
Chapter 7 Internal Loss Data
Summarize the process of collecting internal operational loss data.
Describe the seven categories of operational risk events as defined in Basel II and identify examples of each.
Explain the process a bank should use to report operational loss data, including the setting of thresholds, determining the loss amoun
reference date, and describing the causes of a loss event.
Describe criteria for allocating operational losses to individual business lines within a firm and for the handling of boundary events.
Chapter 8 External Loss Data

Explain the motivations for using external operational loss data and common sources of external data.
Compare the characteristics of external operational loss data from different sources.
Describe challenges which can arise through the use of external data.
Describe the Societe Generale operational loss event, explain the lessons learned from the event and summarize how this event was c
data vendors.
Chapter 12 Capital Modeling

Compare the basic indicator approach, the standardized approach and the alternative standardized approach for calculating the opera
charge and calculate the Basel operational risk charge using each approach.
Describe the modeling requirements for a bank to use the Advanced Measurement Approach (AMA).
Describe the loss distribution approach to modeling operational risk capital.
Explain how frequency and severity distributions of operational losses are obtained, including commonly used distributions and suitab
probability distributions.
Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9 th percentile of an operationa
Explain the use of scenario analysis and the hybrid approach in modeling operational risk capital.
Describe the AMA guidelines for the use of insurance in reducing a banks operational risk capital charge.
Operational RiskSupervisory Guidelines for the Advanced Measurement Approaches, (Basel Committee on Banking Supervisio
2011).* Paragraphs 1-42 (Introduction) and 160-261 (Modeling) only [OR- 6]
Summarize key guidelines for verification and validation of a bank's operational risk management framework (ORMF) and its operatio
management system (ORMS), including the use test and experience.
Describe commonly used distributions used to model the frequency and severity of a banks operational loss events.
Explain key guidelines for modeling the distribution of individual ORCs, including the selection of thresholds, necessary adjustments, a
statistical tools and probability distributions.
Describe techniques used to get an aggregated loss distribution from frequency and severity distributions.
Explain supervisory guidelines for modeling dependence and correlation effects between operational risk factors across different oper
categories.
Describe the four required data elements in an AMA model and the guidelines for combining data from each element in modeling the
Range of Practices and Issues in Economic Capital Frameworks, (Basel Committee on Banking Supervision Publication, March 20
oDefining risk measures
oRisk aggregation
oValidation of models
oDependency modeling in credit risk
oEvaluating counterparty credit risk
oAssessing interest rate risk in the banking book
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designed for regulator
oCredit portfolio management
oRisk based pricing
oCustomer profitability analysis
oManagement incentives
Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice, Board of Governor
Reserve System, August 2013
Describe the Federal Reserves Capital Plan Rule and explain the seven principles of an effective capital adequacy process for bank hol
(BHCs) subject to the Capital Plan Rule.
Describe practices which can result in a strong and effective capital adequacy process for a BHC in the following areas:
oRisk identification
o Internal controls, including model review and validation
oCorporate governance
oCapital policy, including setting of goals and targets and contingency planning
oStress testing and stress scenario design
oEstimating losses, revenues, and expenses, including quantitative and qualitative methodologies
Assessing the impact of capital adequacy, including RWA and balance sheet projections
Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Todays Markets, 3rd Edition (New York: Wiley, 2011)
Chapter 12Repurchase Agreements and Financing

Describe the mechanics of repurchase agreements (repos) and calculate the settlement for a repo transaction.
Explain common motivations for entering into repos, including their use in cash management and liquidity management.
Explain how counterparty risk and liquidity risk can arise through the use of repo transactions.
Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2008 credit crisis.
Compare the use of general and special collateral in repo transactions.

Describe the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an auction cycle.
Calculate the financing value of a bond trading special when used in a repo transaction

Define liquidity risk and describe factors that influence liquidity, including the bid-ask spread.
Differentiate between exogenous and endogenous liquidity.
Describe endogenous price approaches to LVaR, their motivation and limitations.
Describe liquidity at risk (LaR) and compare it to VaR, describe the factors that affect future cash flows, and explain challenges in estim
LaR.
Chapter 16...............................Model Risk

Describe the challenges involved with quantifying model risk, and explain quantitative methods for estimating model risk given unkno
financial model.
Identify ways risk managers can manage and mitigate model risk.

Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such modeling erro
avoided.
Identify two major defects in model assumptions which led to the underestimation of systematic risk for residential mortgage backed
during the 2008-2009 financial downturn.

Define and differentiate between sources of liquidity risk, including transactions liquidity risk, balance sheet/ funding liquidity risk and
Describe issues related to systematic funding liquidity risk with respect to leveraged buyouts, merger arbitrage hedge funds, and conv
hedge funds.
Describe the economics of the collateral market and explain the mechanics of the following transactions using collateral: margin lendi
lending, and total return swaps.
Calculate a firm's leverage ratio, describe the formula for the leverage effect, and explain the relationship between leverage and a firm
Explain the impact on a firms leverage and its balance sheet of the following transactions: purchasing long equity positions on margin
sales, and trading in derivatives.
Identify the main sources of transactions liquidity risk.
Explain the challenges posed by liquidity constraints on hedge funds during times of financial distress.
Describe the major lines of business in which dealer banks operate and the risk factors they face in each line of business.
Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.

Compare and contrast the features and scope of stress tests before and after the Supervisory Capital Assessment Program (SCAP).
Explain challenges in designing stress test scenarios, including the problem of coherence in modeling risk factors.
Describe the challenges in modeling losses under adverse market conditions, including the mapping of macroeconomic risk factors to
intermediate risk factors.
Compare and contrast the 2009 SCAP stress test, the 2011 and 2012 CCAR, and the 2011 EBA Irish and EBA European stress tests in th
and key findings.
John Hull, Risk Management and Financial Institutions, 3rd Edition (New York: John Wiley & Sons, 2012)
Chapter 12..Basel I, II, and Solvency II
Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
Describe and contrast the major elementsincluding a description of the risks coveredof the two options available for the calculati
oStandardised Measurement Method

oInternal Models Approach
Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR according to t
guideline.
oStandardised Approach
oFoundation IRB Approach
oAdvanced IRB Approach
Describe and contract the major elements of the three options available for the calculation of operational risk: basic indicator approac
approach, and the Advanced Measurement Approach.
Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and market discipline.

oProbability of default (PD)
oLoss given default (LGD)
oExposure at default (EAD)
oWorst-case probability of default
Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II framework, an
repercussions to an insurance company for breaching the SCR and MCR.
Compare the standardized approach and the internal models approach for calculating the SCR in Solvency II.
Chapter 13..Basel 2.5, Basel III, and Dodd-Frank

Describe and calculate the stressed value-at-risk measure introduced in Basel 2.5, and calculate the market risk capital charge.
Explain the process of calculating the incremental risk capital charge for positions held in a banks trading book.
Describe the comprehensive risk measure (CRM) for positions which are sensitive to correlations between default risks.
Define in the context of Basel III and calculate where appropriate:

oTier 1 capital and its components
oTier 2 capital and its components
oRequired Tier 1 equity capital, total Tier 1 capital, and total capital
Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer introduced in Basel III.
Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage ratio, the liquidity
the net stable funding ratio.
Describe the mechanics of contingent convertible bonds (CoCos) and explain the motivations for banks to issue them.
Explain the major changes to the U.S. financial market regulations as a result of Dodd-Frank.
Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework Comprehensive Versio
Committee on Banking Supervision Publication, June 2006).*
Describe the key elements of the three pillars of Basel II: Minimum capital requirements, Supervisory review and Market discipline
Describe and contrast the major elements of the three options available for the calculation of credit risk: Standardised Approach, Fou
Approach and Advanced IRB Approach
Describe and contrast the major elements of the three options available for the calculation of operational risk: Basic Indicator Approa
Approach and Advanced Measurement Approach.
Standardised Measurement Method and Internal Models Approach
Capital ratio
Maturity (M)
Concentration risk
Capital charge
Stress tests
Residual risk
Basel III: A Global Regulatory Framework for More Resilient Banks and Banking SystemsRevised Version, (Basel Committee on
Supervision Publication, June 2011).*
oThe measurement, treatment, and calculation of Tier 1 and Tier 2 capital
oRisk coverage, the use of stress tests, the treatment of counter-party risk with credit valuation adjustments, the use of external ratings,
leverage ratios
Explain changes designed to dampen the procyclical amplification of financial shocks and to promote countercyclical buffers.
Describe changes intended to improve the management of liquidity risk including liquidity coverage ratios, net stable funding ratios, a
monitoring metrics.
Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, (Basel Committee on Banking Supervision Publication

Describe the characteristics of high quality liquid assets (HQLA) and operational requirements for assets to qualify as HQLA.
Differentiate between Level 1, Level 2A, and Level 2B assets, and define the respective cap for each asset class as a percentage of tota
Define how total net cash outflows are calculated for the minimum liquidity coverage ratio.
Describe additional metrics to be used by supervisors as monitoring tools when assessing the liquidity risk of a bank.
Revisions to the Basel II Market Risk FrameworkUpdated as of 31 December 2010, (Basel Committee on Banking Supervision Pu
February 2011).*
Explain the relationship regulators require between market risk factors used for pricing versus those used for calculating value-at-risk
captured by the value-at-risk model.

Richard Grinold and Ronald Kahn, Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Cont
Edition (New York: McGraw-Hill, 2000).
Distinguish among the inputs to the portfolio construction process.
Evaluate the methods and motivation for refining alphas in the implementation process.
Assess the impact of practical issues in portfolio construction such as determination of risk aversion, incorporation of specific risk aver
alpha coverage.
Describe portfolio revisions and rebalancing and evaluate the tradeoffs between alpha, risk, transaction costs and time horizon.
Determine the optimal no-trade region for rebalancing with transaction costs.
Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear programming,
programming.
Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marginal VaR, comp
undiversified portfolio VaR, and diversified portfolio VaR.
Explain the difference between risk management and portfolio management, and describe how to use marginal VaR in portfolio mana

Describe the impact of horizon, turnover and leverage on the risk management process in the investment management industry.

Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk and spo
Apply VaR to check compliance, monitor risk budgets and reverse engineer sources of risk.
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Approach (Hoboken, NJ:
Sons, 2003).
Differentiate between time-weighted and dollar-weighted returns of a portfolio and describe their appropriate uses.
Describe and distinguish between risk-adjusted performance measures, such as Sharpes measure, Treynors measure, Jensens measu
and information ratio.
Describe the uses for the Modigliani-squared and Treynors measure in comparing two portfolios, and the graphical representation of
Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model.

Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection decision
contribution.
Andrew Ang, Asset Management: A Systematic Approach to Factor Investing (New York: Oxford University Press, 2014)
Chapter 13...........................Illiquid Assets (excluding section 13.5 Portfolio Choice with Illiquid Assets)
Evaluate the characteristics of illiquid markets
Examine the relationship between market imperfections and illiquidity
Assess the impact of biases on reported returns for illiquid assets.
Compare illiquidity risk premiums across and within asset categories.

Evaluate portfolio choice decisions on the inclusion of illiquid assets.
Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds.

Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes in the development

Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each
Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and explain the impact of s
on portfolio diversification strategies.
Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of assets un
(AUM) in the industry.
Kevin R. Mirabile, Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Per
(Hoboken, NJ: Wiley Finance, 2013)

Roe, M. (2013) Clearinghouse Overconfidence. California Law Review, 101 (6), pp. 1641-1703
Synthesize the advantages of using clearinghouses for the trading derivatives
Analyze the role of clearinghouses in reducing contagion and systemic risk in financial markets
Apply the concept of too big to fail to the use of clearinghouses
Evaluate the shortcomings of clearinghouses in reducing risk
OHara, M. (2014). High-frequency trading and its impact on markets. Financial Analysts Journal, 70, 3. pp. 18-27
Distinguish between algorithmic trading and high frequency trading (HFT)

Identify factors that drove the evolution of HFT
Discuss the implications of HFT on regulation in financial markets
Distinguish between liquidity and timing risk
Clark, C. (2010). Controlling risk in a lightning-speed trading environment. Retrieved from

http://www.chicagofed.org/digital_assets/publications/policy_discussion_papers/2010/PDP2010-1.pdf
Explain the importance of speed to high frequency trading.
Describe ways in which market participants can speed up their trading.

List the advantages and disadvantages of speed.
Describe pre-trade and post-trade risk controls used in the marketplace
Clark, C. (2011). How do exchanges control the risk of high speed trading? Retrieved from
http://www.chicagofed.org/webpages/publications/policy_discussion_papers/2011/pdp_2.cfm
Explain the pre-trade risk controls used by exchanges.
Describe offerings exchanges make to their clients to help manage risk.

Describe monitoring for and mitigation of abnormal trading and market manipulation.
Clark, C. & Ranjan, R. (2012). How do proprietary trading firms control the risks of high speed trading? Retrieved from
http://www.chicagofed.org/webpages/publications/policy_discussion_papers/2012/pdp_1.cfm
Summarize the lifecycle of a new trading strategy for a trading firm.
Describe a firms risk management structure and the role of risk platforms.
Explain the pre-trade and post-trade risk controls employed by trading firms.
Describe the key challenges and best practices in firms risk management.
Report on Cyber Security in the Banking Sector, New York State Department of Financial Services. May 2014. Retrieved from
http://www.dfs.ny.gov/about/press2014/pr140505_cyber_security.pdf
Describe factors contributing to the rise of cyber crime against financial institutions.
Discuss present trends in and the implications of present trends in corporate governance as it relates to cyber security.
Assess the greatest challenges financial institutions face in achieving adequate cyber security.
Framework for Improving Critical Infrastructure Cybersecurity, National Institute of Standards and Technology. February 2014. Re
http://www.nist.gov/cyberframework/upload/cybersecurity-framework-021214.pdf
Explain the five core functions in the framework that an organization can use to mitigate cyber security risk, and provide examples of
with each function.
Explain how an organization can implement and communicate a process to manage cyber security risk.
Describe methodologies an organization can use to address privacy and civil liberties concerns associated with cyber security operatio
Hull, J. (2014) The Changing Landscape for Derivatives, by John Hull, Joseph L. Rotman School of Management University of Toro
from http://www-2.rotman.utoronto.ca/~hull/DownloadablePublications/Derivs_Changing_Landscape.pdf*
Discuss the background and current status of OTC trading.
Discuss how a central counterparty (CCP) can operate as an OTC derivative trading venue with respect to clearing and reporting.
Explain the concept of too-big-to-fail CCPs, and discuss some points of weakness in this concept.
Hull, J. & White, A. (2014). Valuing Derivatives: Funding value adjustments and fair value, Financial Analysts Journal 70 (3), pp. 46-5
Understand the use and purpose of funding value adjustments (FVA).
Compare and contrast the view on funding FVA from the perspectives of trading, accounting and financial theory.
Distinguish between FVA and debit (or debt) value adjustment (DVA) and credit value adjustment (CVA).
Evaluate the implications of using FVA, including the potential for arbitrage.
2016 Reading #
36.1
36.2
36.3
NOTE MOVED TO T7
37.1
37.2
38
39.1
39.2
39.3
39.4
40.1
40.2
40.3
40.4
40.5
41.1
41.2
42.1
42.2
43
44
45.1
45.2
45.3
45.4
46.1
46.2
46.3
46.4
46.5
46.6
46.7
46.8
47.1
47.2
48
49
50
51
52
53
54
54.1
54.2
55
56
57
58
59
60
61.1
61.2
62
63
64.1
64.2
64.3
65
66
67
68
69
70
71.1
71.2
72
73
74
75
76
77
78
79
80
81
82
83
84
Estimate VaR using a parametric approach for both normal and lognormal return distributions.
Estimate the expected shortfall given P/L or return data.
Estimate risk measures by estimating quantiles.
Evaluate estimators of risk measures by estimating their standard errors.
Interpret QQ plots to identify the characteristics of a distribution.

Apply the bootstrap historical simulation approach to estimate coherent risk measures.
Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical simulation approach
Identify advantages and disadvantages of non-parametric estimation methods.

Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition. (New York: McGraw Hill, 2007)
Verify a model based on exceptions or failure rates.
Explain the need to consider conditional coverage in the backtesting framework.

Differentiate among the three methods of mapping portfolios of fixed income securities.
Messages from the Academic Literature on Risk Measurement for the Trading Book, Basel Committee on Banking Supervision, W
Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varying volatility
backtesting.

Compare the results of research on "top-down" and "bottom-up" risk aggregation methods.
. Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management framework.
Describe the structure, uses, and payoffs of a correlation swap.
Estimate the impact of different correlations between assets in the trading book on the VaR capital charge.
Explain the role of correlation risk in market risk and credit risk.
Relate correlation risk to systemic and concentration risk.

Evaluate the limitations of financial modeling with respect to the model itself, calibration of the model, and the models output.
Assess the Pearson correlation approach, Spearmans rank correlation, and Kendalls t, and evaluate their limitations and usefulness in fin
Chapter 4 .Financial Correlation Modeling Bottom-Up Approaches (Sections 4.3.0 (intro), 4.3.1, and 4.3.2 only)
Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaussian copula.


Define option-adjusted spread (OAS) and apply it to security pricing.

Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed income securities.
Evaluate the appropriateness of the Black-Scholes-Merton model when valuing derivatives on fixed income securities.
Estimate the convexity effect using Jensen's inequality.
Evaluate the impact of changes in maturity, yield and volatility on the convexity of a security.

Construct and describe the effectiveness of a short term interest rate tree assuming normally distributed rates, both with and without
Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed rates and no
Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with mean reversio

Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model with tim


Evaluate the appropriateness of OIS rate as a proxy for the risk-free rate.
Describe how to use the OIS zero curve in determining forward LIBOR rates and valuing swaps.

Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pr
asset.
Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volatility.
Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its shape.

Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook (Hoboken, NJ: John Wiley & Sons, 2013).

Describe, compare and contrast various credit risk mitigants and their role in credit analysis.
Describe quantitative measurements and factors of credit risk, including probability of default, loss given default, exposure at default,


oIllustrate and interpret security-holder payoffs based on the Merton model
oUsing the Merton Model, calculate the value of a firms equity and the default probability of a firms debt.
oDescribe the results and practical implications of empirical studies that use the Merton model to value debt
Compare the following quantitative methodologies for credit analysis and scoring: linear discriminant analysis, parametric discriminati
and support vector machines.
Using the Merton model, calculate the value of a firms debt and equity and the volatility of firm value.
Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equity, and the ris
Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, CreditRisk+, CreditMe


Explain the following concepts related to default and recovery: default events, probability of default, credit exposure, and loss given d
Summarize credit assessment techniques such as credit ratings and rating migrations, internal ratings, and risk models.
Describe counterparty risk, compare counterparty risk to credit risk, and explain how counterparty risk can be mitigated.
Describe the Merton Model, and use it to calculate the value of a firm, the values of a firms debt and equity, and default probabilities
Define and calculate Credit VaR


Define and calculate default correlation for credit portfolios.

Compute and evaluate one or two iterations of interim cashflows in a three tiered securitization structure.

Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Editi
& Sons, 2012).
Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default and the

Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describ
of the ISDA master agreement.
Describe the mechanics of termination provisions and trade compressions explain their advantages and disadvantages
Describe the rationale for collateral management.
Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to credit quality.
Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.
Chapter 7...Central Counterparties
Explain the objectives and functions of central counterparties (CCPs).
Discuss the strengths and weaknesses of CCPs.
Describe the different CCP netting schemes, the benefit of netting and distinguish between bilateral netting and multilateral ne
Discuss the key challenges in relation to the clearing of over-the-counter (OTC) derivative products.
Describe the three types of participants that channel trade through a CCP.
Explain the loss waterfall in a CCP structure.
Define initial margin and variation margin and describe the different approaches and factors in calculating initial margin.
Discuss the impact of initial margin on prices, volume, volatility, and credit quality.
Explain factors that can lead to failure of a CCP and discuss measures to protect CCPs from default.

Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future expos
and negative exposure, effective exposure, and maximum exposure.
Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determination of
Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period, threshold, and minimu

Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default probabilities in pricing derivativ
Compare the various approaches for estimating price: historical data approach, equity based approach, and risk neutral approach.


Michael Crouhy, Dan Galai and Robert Mark, The Essentials of Risk Management, 2nd Edition (New York: McGraw-Hill, 2014)
Chapter 9..Credit Scoring and Retail Credit Risk Management

Analyze the credit risks and other risks generated by retail banking.
Explain the differences between retail credit risk and corporate credit risk.
Discuss the dark side of retail credit risk and the measures that attempt to address the problem.
Define and describe credit risk scoring model types, key variables, and applications.
Discuss the key variables in a mortgage credit assessment and describe the use of cutoff scores, default rates and loss rates in a credit s
Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (CAP) and the ac
Describe the customer relationship cycle and discuss the trade-off between creditworthiness and profitability.
Discuss the benefits of risk-based pricing of financial services.
Chapter 12...The Credit Transfer Marketsand Their Implications

Discuss the flaws in the securitization of subprime mortgages prior to the financial crisis of 2007.
Identify and explain the different techniques used to mitigate credit risk, and describe how some of these techniques are changing the
Describe the originate-to-distribute model of credit risk transfer and discuss the two ways of managing a bank credit portfolio.
Describe the different types and structures of credit derivatives including credit default swap (CDS), first-to-default put, total return swa
linked note (CLN), and their applications.
Explain the credit risk securitization process and describe the structure of typical collateralized loan obligations (CLOs) or collateralized
Describe synthetic CDOs and single-tranche CDOs.

Assess the rating of CDOs by rating agencies prior to the 2007 financial crisis.
Moorad Choudhry, Structured Credit Products: Credit Derivatives & Synthetic Sercuritisation, 2nd Edition (New York: John Wiley & S
Chapter 12...An Introduction to Securitisation
Explain the terms over-collateralization, first-loss piece, equity piece, and cash waterfall within the securitization process.
Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose vehicle (SPV) and distingu
structures: amortizing, revolving, and master trust.
Explain the reasons for and the benefits of undertaking securitization.
Describe and assess the various types of credit enhancements.
Explain the various performance analysis tools for securitized structures and identify the asset classes to which they are most applicabl
Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR), the weighte
weighted average maturity (WAM), and the weighted average life (WAL) for relevant securitized structures.
Explain the prepayment forecasting methodologies and calculate the constant prepayment rate (CPR) and the Public Securities Associati
Explain the decline in demand in the new-issue securitized finance products market following the 2007 financial crisis.
Adam Ashcraft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal Reserve Bank of New
(March 2008).*
Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of each factor to the subpri
Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower and the features a
loan.
Evaluate the role of the Board of Directors and senior management in implementing an effective operational risk structure per the Ba
Describe features of an effective control environment and identify specific controls which should be in place to address operational ris
Describe and outline business resiliency and continuity plans for banks under the Basel Committee framework.
Identify and discuss the role of a banks public disclosures.
Brian Nocco and Ren Stulz, Enterprise Risk Management: Theory and Practice, Journal of Applied Corporate Finance 18, No. 4 (2
Explain how implementing ERM practices and policies can create shareholder value both at the macro and the micro level.
Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firms market risk, credit risk an
Distinguish between regulatory and economic capital, and explain the use of economic capital in the corporate decision making proces
Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, Senior Supervisors Group, December 2010.*
Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits to a firm of having a
Describe best practices for a firms Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors in the development an
RAF.
Explain the benefits to a firm from having a robust risk data infrastructure, and describe key elements of an effective IT risk managem

Marcelo G. Cruz, Gareth W. Peters, and Pavel V. Shevchenko, Fundamental Aspects of Operational
Risk and Insurance Analytics: A Handbook of Operational Risk (New York: John Wiley & Sons, 2015)
Chapter 2.. OpRisk Data and Governance
Describe the seven Basel II event risk categories and identify examples of operational risk events in each category.
Summarize the process of collecting and reporting internal operational loss data, including the selection of thresholds, the timeframe
expected operational losses.
Explain the use of a Risk Control Self Assessment (RCSA) and key risk indicators (KRIs) in identifying, controlling and assessing operatio
Describe and assess the use of scenario analysis in managing operational risk, and identify biases and challenges which can arise whe
Compare the typical operational risk profiles of firms in different financial sectors.
Compare different organizational designs for a risk management framework.
Philippa X. Girling, Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework (Hoboken: John W

Explain ways in which data from different external sources may differ.
Describe the Socit Gnrale operational loss event and explain the lessons learned from the event.

Compare the basic indicator approach, the standardized approach and the alternative standardized approach for calculating the opera
calculate the Basel operational risk charge using each approach.
Explain how frequency and severity distributions of operational losses are obtained, including commonly used distributions and suitab
distributions.
Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9 th percentile of an operationa
Describe the AMA guidelines for the use of insurance in reducing a banks operational risk capital charge.
Operational RiskSupervisory Guidelines for the Advanced Measurement Approaches, (Basel Committee on Banking Supervisio
Paragraphs 1-42 (Introduction) and 160-261 (Modeling) only [OR- 6]
Summarize key guidelines for verification and validation of a bank's operational risk management framework (ORMF) and its operatio
(ORMS), including the use test and experience.
Describe commonly used distributions used to model the frequency and severity of a banks operational loss events.
Explain key guidelines for modeling the distribution of individual ORCs, including the selection of thresholds, necessary adjustments, a
probability distributions.
Describe techniques used to get an aggregated loss distribution from frequency and severity distributions.
Explain supervisory guidelines for modeling dependence and correlation effects between operational risk factors across different oper
Describe the four required data elements in an AMA model and the guidelines for combining data from each element in modeling the
Michael Crouhy, Dan Galai and Robert Mark, The Essentials of Risk Management, 2nd Edition (New
York: McGraw-Hill, 2014)
Chapter 15.. Model Risk
Identify and explain errors in modeling assumptions that can introduce model risk.
Explain how model risk can arise in the implementation of a model.
Explain methods and procedures risk managers can use to mitigate model risk.
Explain the impact of model risk and poor risk governance in the 2012 London Whale trading loss and the 1998 collapse of Long Term C
Chapter 17. Risk Capital Attribution and Risk-Adjusted Performance Measurement
Define, compare and contrast risk capital, economic capital and regulatory capital, and explain the motivations for using economic cap
Compute and interpret the RAROC for a project, loan, or loan portfolio, and use RAROC to compare business unit performance.
Explain the impact of changing assumptions used in calculating economic capital, including choosing a time horizon, measuring defau
confidence level.
Calculate the hurdle rate and apply this rate in making business decisions using RAROC.
Explain challenges in modeling diversification benefits, including aggregating a firms risk capital and allocating economic capital to diff
Explain best practices in implementing a RAROC approach.
Range of Practices and Issues in Economic Capital Frameworks, (Basel Committee on Banking Supervision Publication, March 20
oDefining risk measures
oRisk aggregation
oValidation of models
oDependency modeling in credit risk
oEvaluating counterparty credit risk
oAssessing interest rate risk in the banking book
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designed for regulator
oCredit portfolio management
oRisk based pricing
oCustomer profitability analysis
oManagement incentives
Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice, Board of Governor
August 2013
Describe the Federal Reserves Capital Plan Rule and explain the seven principles of an effective capital adequacy process for bank hol
the Capital Plan Rule.
oRisk identification
oCorporate governance
oCapital policy, including setting of goals and targets and contingency planning
oStress testing and stress scenario design
oEstimating losses, revenues, and expenses, including quantitative and qualitative methodologies
oAssessing the impact of capital adequacy, including RWA and balance sheet projections
Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Todays Markets, 3rd Edition (New York: Wiley, 2011)

Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2008 credit crisis.

Describe the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an auction cycle.

Describe endogenous price approaches to LVaR, their motivation and limitations and calculate the elasticity-based liquidity adjustmen
Describe liquidity at risk (LaR) and compare it to VaR, describe the factors that affect future cash flows, and explain challenges in estim

Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors to portfolio pos
Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such modeling erro
Identify two major defects in model assumptions which led to the underestimation of systematic risk for residential mortgage backed
2009 financial downturn.

Differentiate between sources of liquidity risk, including balance sheet/ funding liquidity risk, systemic risk funding liquidity risk and tr
explain how each of these risks can arise for financial institutions.
Summarize the asset-liability management process at a fractional-reserve bank , including the process of liquidity transformation.
Explain the liquidity characteristics and risks of structured credit products.
Describe specific liquidity challenges faced by money market mutual funds and by hedge funds, particularly in stress situations.
Describe transactions used in the collateral market and explain risks that can arise through collateral market transactions.
Describe the relationship between leverage and a firm's return profile and calculate the leverage effect.
Explain the impact on a firms leverage and its balance sheet of the following transactions: purchasing long equity positions on margin
trading in derivatives.
Explain methods to measure and manage funding liquidity risk and transactions liquidity risk.
Calculate the expected transactions cost and spread risk factor for a transaction, and calculate the liquidity adjustment to VaR for a po
number of trading days.
Explain interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.

Compare and contrast the features and scope of stress tests before and after the Supervisory Capital Assessment Program (SCAP).
Identify and explain challenges in modeling a bank's losses and revenues over a stress test horizon period.
Compare and contrast the 2009 SCAP stress test, the 2011 and 2012 CCAR, and the 2011 EBA Irish and EBA European stress tests in th
findings.
John Hull, Risk Management and Financial Institutions, 4th Edition (New York: John Wiley & Sons, 2012)
Chapter 15. Basel I, Basel II, and Solvency II
Explain the motivations for introducing the Basel regulations, including key risk exposures addressed and explain the reasons for revis
Explain the calucation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
oStandardised Measurement Method

oInternal Models Approach
Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR.
oStandardised Approach
oFoundation IRB Approach
oAdvanced IRB Approach
Describe and contrast the major elements of the three options available for the calculation of operational risk: basic indicator approac
Advanced Measurement Approach.
Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and market discipline.

oProbability of default (PD)
oLoss given default (LGD)
oExposure at default (EAD)
oWorst-case probability of default
Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II framework, an
insurance company for breaching the SCR and MCR.
Chapter 16. Basel II.5, Basel III, and Other Post-Crisis Changes
Describe and calulate the stressed value-at-risk measure introduced in Basel 2.5, and calculate the market risk capital charge.
Explain the process of calculating the incremental risk capital charge for positions held in a bank's trading book.
Define in the context of Basel III and calculate where appropriate

Required Tier 1 equity capital, total Tier 1 capital, and total capital
Describe the motivations for and calculate the capital conservation buffer and the counterycyclical buffer introduced in Basel III.
Describe and calculate ratios intended to improve the management of liquidity risk, including the required elverage ratio, the liquidity cover
ratio.
Explain the major changes to the U.S. financial market regulations as a result of Dodd-Frank
Chapter 17. Fundamental Review of the Trading Book

Describe the proposed changes to the Basel market risk capital calculation and the motivations for these changes, and calcu
under this method.
Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank can calculat
the various horizons.
Explain proposed midifications to Basel regulations in the following areas:
Classification of positions in the trading book compared to the banking book
Treatment of credit spread and jump-to-default risk, including the incremental default risk charge
Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework Comprehensive Versio
Supervision Publication, June 2006).*
Basel III: A Global Regulatory Framework for More Resilient Banks and Banking SystemsRevised Version, (Basel Committee on
Note: GARP no longer provides learning objectives for the regulatory readings
Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, (Basel Committee on Banking Supervision Publication
Revisions to the Basel II Market Risk FrameworkUpdated as of 31 December 2010, (Basel Committee on Banking Supervision Pu
"Basel III: the net stable funding ratio." (Basel Committee on Banking Supervision Publication,
October 2014).

Richard Grinold and Ronald Kahn, Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Cont
York: McGraw-Hill, 2000).
Assess the impact of practical issues in portfolio construction such as determination of risk aversion, incorporation of specific risk aver
Describe portfolio revisions and rebalancing and evaluate the tradeoffs between alpha, risk, transaction costs and time horizon.
Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear programming,
Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marginal VaR, comp
VaR, and diversified portfolio VaR.
Explain the risk-minimizing position and the risk and return-optimizing position of a portfolio.
Explain the difference between risk management and portfolio management, and describe how to use marginal VaR in portfolio mana

Describe the impact of horizon, turnover and leverage on the risk management process in the investment management industry.

Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk and spo
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Approach (Hoboken, NJ:

Describe the use of alpha, benchmark, and peer group as inputs in performance measurement tools.
Describe and distinguish between risk-adjusted performance measures, such as Sharpes measure, Treynors measure, Jensens measu
information ratio.
Describe the uses for the Modigliani-squared and Treynors measure in comparing two portfolios, and the graphical representation of
Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model and comp

Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection decision
Andrew Ang, Asset Management: A Systematic Approach to Factor Investing (New York: Oxford University Press, 2014)
Chapter 13...........................Illiquid Assets (excluding section 13.5 Portfolio Choice with Illiquid Assets)
Evaluate the characteristics of illiquid markets
Describe the unsmoothing of returns and its properties
Evaluate portfolio choice decisions on the inclusion of illiquid assets.

Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes in the development

Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each
Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and explain the impact of s
diversification strategies.
Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of assets un
industry.
Kevin R. Mirabile, Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Per
Finance, 2013)

Glasserman, Paul. (2012). Forging Best Practices in Risk Management (Note: Only Section 2: FirmLevel Issues in Risk Measurement
Working Paper #0002.
Identifythe areas of risk management that have been most affeced byt the recent financial crisis and describe the major trends and de
crisis.
Evaluate the presence of volatility regimes in market data.
Analyze the implications of multiple firms attempting to take the same risk-mitigating steps
Describe the implications of risk-mitigation strategies employed by firms and how they can amplify risk.
Explain practices to address and alleviate amplified risk.
Yorulmazer, Tanju. (2014). Case Studies on Disruptions During the Crisis. FRBNY Economic Policy Review.
Understand the use and purpose of funding mechanisms and describe the distress in the markets during the recent credit crisis.
Distinguish between Commercial Paper and Asset-Backed Commercial Paper and describe the policy responses to recent market collap
Compare and contrast sources of disruption in the money market mutual funds, rep markets, and credit commitments.
Evaluate the implications of the dollar fnding model of non-U.S. banks during the recent crisis.
Why do we need both liquidity regulations and a lender of last resort? A perspective from Federal Reserve lending during the 2007-0
Reserve Board. February 2015
Compare the advantages and disadvantages of liquidity regulations and a lender of last resort in managing liquidity and systemic risk d
situations where each is more effective.
Explain how the existence of a lender of last resort can create moral hazard.
Describe situations where a central bank should begin lending to banks before liquidity buffers are exhausted.
Describe challenges and constraints to a central bank acting as a lender of last resort.
Analyze the Federal Reserve's lending policies and lending decisions during the 2007-2009 financial crisis, and describe the effectivene
Explain how a combination of liquidity regulations and lender of last resort can lead to an optimal policy mix to manage systemic risk
Global financial markets liquidity study (Note: Sections 1, 2, and 4 only). Pwc. August 2015
Define liquidity and describe the dimensions by which liquidity can be measured.
Explain how liquidity is provided in different financial markets, including the role of market makers and the economics of market making.
Describe current global trends and factors which have impacted liquidity in financial markets and explain their liquidity impact.
Summarize trends over the past 10 years in the volume and liquidity of the following financial markets: interest rates and interest rate de
corporate bonds, CDS, securitized products, foreign exchange, equities, and emerging market financial products.
Duffie, Darrell and Stein, C. Jeremy. (2015). Reforming LIBOR and Other Financial Market
Benchmarks. Journal of Economic PerspectivesVolume 29, Number 2. Spring 2015. pp 191212
Discuss the recommended principles to make benchmark rates such as LIBOR and other interbank offered rates less susceptible to manip
Evaluate the implications, advantages, and disadvantages of using benchmarks.
Assess the types of agglomeration effects after a benchmark has been established.
Explain the motives for manipulating benchmarks and describe the processes to alleviate manipulation.
Describe how the US dollar LIBOR is used and identify the costs associated with the increase in trading of LIBOR-linked contracts.
Explain and assess some proposed methodologies to reform LIBOR.
Froukelien Wendt. (2015). Central Counterparties: Addressing their Too Important to Fail Nature.
IMF Working Paper
Describe the benefits of central counterparties (CCPs) and the potential risks which can arise when clearing through a CCP.
Explain the interconnections between central counterparties and other financial institutions, including banks, clearing members, financia
Explain how the failure of a CCP can spread systemic risk to other financial markets or institutions.
Identify policy measures designed to reduce the probability or impact of potential CCP failures, and describe limitations to these measure
Explain measures which can be adopted to mitigate systemic risks related to interconnections and interdependence of CCPs
German Gutierrez Gallardo (NYU), Til Schuermann (Oliver Wyman), Michael Duane (Oliver Wyman).
2015. Stress Testing Convergence
Explain how trends in stress testing and capital management have evolved from the 2009 SCAP to the 2015 CCAR.
Compare trends in capital management approaches by different classes of CCAR institutions from 2012 to 2015, and explain the motivati
adopt their approach.
Identify and describe factors that have encouraged banks to manage capital more closely to regulatory minimum levels.
Describe potential consequences as stress test results from different banks have appeared to converge and more institutions begin to ma
results.
Cybersecurity 101: A Resource Guide for Bank Executives. Conference of State Banking
Supervisors. December 2014
Identify the five core functions of the NISTs Cybersecurity Framework.
Explain the risk assessment process to identify threats to information or information systems.
Describe various measures to protect banks systems, assets, and data.
Describe approaches to detect system intrusions, data breaches, and unauthorized access.
Explain the incident response plan and the recovery plan.
2017 Reading #
35.1
35.2
36.1
36.2
37
38.1
38.2
38.3
38.4
39.1
39.2
39.3
39.4
39.5
40.1
40.2
41.1
41.2
42.1
42.2
43
44
44.1
44.2
44.3
45.1
45.2
45.3
45.4
45.5
45.6
45.7
45.8
46
47.1
47.2
48
49
50
51
52
53
MOVED FROM T1
54
55
55.1
55.2
56
57
MOVED FROM T5
58
59.1
59.2
60
61
62
63
64.1
64.2
65
66
67
68.1
68.2
68.3
69
70
71
72
73
74
75.1
75.2
75.3
75.4
76
77.1
77.2
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84
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88
Estimate VaR using a parametric approach for both normal and lognormal return distributions.
Estimate the expected shortfall given P/L or return data.
Estimate risk measures by estimating quantiles.
Evaluate estimators of risk measures by estimating their standard errors.
Interpret QQ plots to identify the characteristics of a distribution.

Apply the bootstrap historical simulation approach to estimate coherent risk measures.
Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical
simulation approaches.
Identify advantages and disadvantages of non-parametric estimation methods.
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition. (New York: McGraw
Hill, 2007)
Verify a model based on exceptions or failure rates.
Explain the need to consider conditional coverage in the backtesting framework.

Differentiate among the three methods of mapping portfolios of fixed income securities.
Messages from the Academic Literature on Risk Measurement for the Trading Book, Basel Committee on Banking
Supervision, Working Paper, No. 19, Jan 2011.
Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time
varying volatility in VaR risk factors, and VaR backtesting.

Compare the results of research on "top-down" and "bottom-up" risk aggregation methods.
. Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management
framework.
Describe the structure, uses, and payoffs of a correlation swap.
Estimate the impact of different correlations between assets in the trading book on the VaR capital charge.
Explain the role of correlation risk in market risk and credit risk.
Relate correlation risk to systemic and concentration risk.

Evaluate the limitations of financial modeling with respect to the model itself, calibration of the model, and the models
output.
Assess the Pearson correlation approach, Spearmans rank correlation, and Kendalls t, and evaluate their limitations and
usefulness in finance.
Chapter 4 .Financial Correlation Modeling Bottom-Up Approaches (Sections 4.3.0 (intro), 4.3.1, and
4.3.2 only)
Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the
Gaussian copula.


Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple
periods.
Define option-adjusted spread (OAS) and apply it to security pricing.
Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed
income securities.
Evaluate the appropriateness of the Black-Scholes-Merton model when valuing derivatives on fixed income securities.
Estimate the convexity effect using Jensen's inequality.
Evaluate the impact of changes in maturity, yield and volatility on the convexity of a security.

Construct and describe the effectiveness of a short term interest rate tree assuming normally distributed rates, both
with and without drift.
Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed
rates and no drift.
Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with
mean reversion.

Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a
model with time dependent volatility.

Evaluate the appropriateness of OIS rate as a proxy for the risk-free rate.
Describe how to use the OIS zero curve in determining forward LIBOR rates and valuing swaps.

Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price
and to the pricing of options on the underlying asset.
Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied
volatility.
Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its
shape.
Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook, 2nd Edition (Hoboken, NJ: John Wiley &
Sons, 2013).
Describe, compare and contrast various credit risk mitigants and their role in credit analysis.
Describe quantitative measurements and factors of credit risk, including probability of default, loss given default,
exposure at default, expected loss, and time horizon.

Giacomo De Laurentis, Renato Maino, and Luca Molteni, Developing, Validating and Using Internal Ratings (West
Sussex, United Kingdom: John Wiley & Sons, 2010).
Chapter 2...............................Classifications and Key Concepts of Credit Risk
Describe the role of ratings in credit risk management.
Describe classifications of credit risk and their correlation with other financial risks.
Define default risk, recovery risk, exposure risk and calculate exposure at default.
Explain expected loss, unexpected loss, VaR, and concentration risk, and describe the differences among them.
Evaluate the marginal contribution to portfolio unexpected loss.
Define risk-adjusted pricing and determine risk-adjusted return on risk-adjusted capital (RARORAC).
Chapter 3...............................Ratings Assignment Methodologies

Explain the key features of a good rating system.
Describe the experts-based approaches, statistical-based models, and numerical approaches to predicting default.
Describe a rating migration matrix and calculate the probability of default, cumulative probability of default, marginal
probability of default, and annualized default rate.
Describe rating agencies assignment methodologies for issue and issuer ratings.
Describe the relationship between borrower rating and probability of default.
Compare agencies ratings to internal experts-based rating systems.
Distinguish between the structural approaches and the reduced-form approaches to predicting default.
Apply the Merton model to calculate default probability and the distance to default and describe the limitations of using the
Merton model.
Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample of firms
by credit quality.
Describe the application of logistic regression model to estimate default probability.
Define and interpret cluster analysis and principal component analysis.
Describe the use of cash flow simulation model in assigning rating and default probability, and explain the limitations of the
model.
Describe the application of heuristic approaches, numeric approaches, and artificial neural network in modeling default risk
and define their strengths and weaknesses.
Describe the role and management of qualitative information in assessing probability of default.
Using the Merton model, calculate the value of a firms debt and equity and the volatility of firm value.
Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equity,
and the risk of default.
Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model,
CreditRisk+, CreditMetrics, and the KMV model.

Calculate the conditional default probability given the hazard rate.

Define and calculate default correlation for credit portfolios.

Compute and evaluate one or two iterations of interim cashflows in a three tiered securitization structure.

Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial
Markets, 2nd Edition (West Sussex, UK: John Wiley & Sons, 2012).
Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given
default and the recovery rate.

Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages,
and describe how they fit into the framework of the ISDA master agreement.
Describe the mechanics of termination provisions and trade compressions explain their advantages and disadvantages
Describe the rationale for collateral management.
Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to
credit quality.
Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through
collateralization.
Chapter 7...Central Counterparties
Explain the objectives and functions of central counterparties (CCPs).
Discuss the strengths and weaknesses of CCPs.
Describe the different CCP netting schemes, the benefit of netting and distinguish between bilateral netting and multilateral
netting.
Discuss the key challenges in relation to the clearing of over-the-counter (OTC) derivative products.
Describe the three types of participants that channel trade through a CCP.
Explain the loss waterfall in a CCP structure.
Define initial margin and variation margin and describe the different approaches and factors in calculating initial margin.
Discuss the impact of initial margin on prices, volume, volatility, and credit quality.
Explain factors that can lead to failure of a CCP and discuss measures to protect CCPs from default.

Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential
future exposure, expected positive exposure and negative exposure, effective exposure, and maximum exposure.
Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the
determination of credit exposure.
Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period, threshold,
and minimum transfer amount.

Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default probabilities in
pricing derivative contracts.
Compare the various approaches for estimating price: historical data approach, equity based approach, and risk neutral
approach.

Stress Testing: Approaches, Methods, and Applications, Edited by Akhtar Siddique and Iftekhar Hasan
Chapter 4..The Evolution of Stress Testing Counterparty Exposures (By David Lynch)
Differentiate among current exposure, peak exposure, expected exposure, and expected positive exposure.
Explain the treatment of counterparty credit risk (CCR) both as a credit risk and as a market risk and describe its implications for
trading activities and risk management for a financial institution.
Describe a stress test that can be performed on a loan portfolio and on a derivative portfolio.
Calculate the stressed expected loss, the stress loss for the loan portfolio and the stress loss on a derivative portfolio.
Describe a stress test that can be performed on CVA.
Calculate the stressed CVA and the stress loss on CVA.
Calculate the debt value adjustment (DVA) and explain how stressing DVA enters into aggregating stress tests of CCR.
Describe the common pitfalls in stress testing CCR.
Michael Crouhy, Dan Galai and Robert Mark, The Essentials of Risk Management, 2nd Edition (New York: McGraw-Hill, 2014)
Chapter 9..Credit Scoring and Retail Credit Risk Management

Analyze the credit risks and other risks generated by retail banking.
Explain the differences between retail credit risk and corporate credit risk.
Discuss the dark side of retail credit risk and the measures that attempt to address the problem.
Define and describe credit risk scoring model types, key variables, and applications.
Discuss the key variables in a mortgage credit assessment and describe the use of cutoff scores, default rates and loss rates in a
credit scoring model.
Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (CAP) and the
accuracy ratio (AR) techniques.
Describe the customer relationship cycle and discuss the trade-off between creditworthiness and profitability.
Discuss the benefits of risk-based pricing of financial services.
Chapter 12...The Credit Transfer Marketsand Their Implications

Discuss the flaws in the securitization of subprime mortgages prior to the financial crisis of 2007.
Identify and explain the different techniques used to mitigate credit risk, and describe how some of these techniques are changing
the bank credit function.
Describe the originate-to-distribute model of credit risk transfer and discuss the two ways of managing a bank credit portfolio.
Describe the different types and structures of credit derivatives including credit default swap (CDS), first-to-default put, total return
swaps (TRS), asset-backed credit-linked note (CLN), and their applications.
Explain the credit risk securitization process and describe the structure of typical collateralized loan obligations (CLOs) or
collateralized debt obligations (CDOs).
Describe synthetic CDOs and single-tranche CDOs.
Assess the rating of CDOs by rating agencies prior to the 2007 financial crisis.
Moorad Choudhry, Structured Credit Products: Credit Derivatives & Synthetic Sercuritisation, 2nd Edition (New York: John Wiley
& Sons, 2010)
Chapter 12...An Introduction to Securitisation
Explain the terms over-collateralization, first-loss piece, equity piece, and cash waterfall within the securitization process.
Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose vehicle (SPV) and
distinguish between the three main SPV structures: amortizing, revolving, and master trust.
Explain the reasons for and the benefits of undertaking securitization.
Describe and assess the various types of credit enhancements.
Explain the various performance analysis tools for securitized structures and identify the asset classes to which they are most
applicable.
Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR), the
weighted average coupon (WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for relevant securitized
structures.
Explain the prepayment forecasting methodologies and calculate the constant prepayment rate (CPR) and the Public Securities
Association (PSA) rate.
Explain the decline in demand in the new-issue securitized finance products market following the 2007 financial crisis.
Adam Ashcraft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal Reserve Bank of
New York Staff Reports, no. 318, (March 2008).*
Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of each factor to the
subprime mortgage problems.
Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower and the
features and performance of a subprime loan.
Explain guidelines for strong governance of operational risk, and evaluate the role of the board of directors and senior
management in implementing an effective operational risk framework.
Describe tools and processes which can be used to identify and assess operational risk
Describe features of an effective control environment and identify specific controls which should be in place to address
operational risk.
Explain the Basel committee's suggestions for managing technology risk and outsourcing risk.
Finance 18, No. 4 (2006): 820.*
Define enterprise risk management (ERM) and explain how implementing ERM practices and policies can create
shareholder value, both at the macro and the micro level.
Describe the development and implementation of an ERM system, as well as challenges to the implementation of an ERM
system.
Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firms market risk,
credit risk and operational risk distributions.
Distinguish between regulatory and economic capital, and explain the use of economic capital in the corporate decision
making process.
Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, Senior Supervisors Group,
December 2010.*
Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits to a firm
of having a well developed RAF.
Describe best practices for a firms Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors in the
development and implementation of an effective RAF.
Explain the benefits to a firm from having a robust risk data infrastructure, and describe key elements of an effective IT risk
management policy at a firm.
Anthony Tarantino and Deborah Cernauskas, Risk Management in Finance: Six Sigma and Other Next Generation Techniques
Chapter 3 ................................Information Risk and Data Quality Management
Identify the most common issues that result in data errors.
Explain how a firm can set expectations for its data quality and describe some key dimensions of data quality used in this process.
Describe the operational data governance process, including the use of scorecards in managing information risk.
Marcelo G. Cruz, Gareth W. Peters, and Pavel V. Shevchenko, Fundamental Aspects of Operational
Risk and Insurance Analytics: A Handbook of Operational Risk (New York: John Wiley & Sons, 2015)
Chapter 2.. OpRisk Data and Governance
Describe the seven Basel II event risk categories and identify examples of operational risk events in each category.
Summarize the process of collecting and reporting internal operational loss data, including the selection of thresholds, the
timeframe for recoveries, and reporting expected operational losses.
Explain the use of a Risk Control Self Assessment (RCSA) and key risk indicators (KRIs) in identifying, controlling and
assessing operational risk exposures.
Describe and assess the use of scenario analysis in managing operational risk, and identify biases and challenges which
can arise when using scenario analysis.
Compare the typical operational risk profiles of firms in different financial sectors.
Explain the role of operational risk governance and explain how a firms organizational structure can impact risk
governance.
Philippa X. Girling, Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework
(Hoboken: John Wiley & Sons, 2013).

Explain ways in which data from different external sources may differ.
Describe the Socit Gnrale operational loss event and explain the lessons learned from the event.

Compare the basic indicator approach, the standardized approach and the alternative standardized approach for
calculating the operational risk capital charge and calculate the Basel operational risk charge using each approach.
Explain how frequency and severity distributions of operational losses are obtained, including commonly used distributions
and suitability guidelines for probability distributions.
Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9 th percentile of an
operational loss distribution.
Basel Committee on Banking Supervision Consultative Document, Standardised Measurement Approach for
Operational Risk, March 2016.
Explain the elements of the proposed Standardized Measurement Approach (SMA), including the business indicator,
internal loss multiplier and loss component, and calculate the operational risk capital requirement for a bank using the SMA.
Compare the SMA to earlier methods of calculating operational risk capital, including the Alternative Measurement
Approaches (AMA), and explain the rationale for the proposal to replace them.
Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and treatment
of operational loss data.
Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: John Wiley & Sons, 2005).
Giacomo De Laurentis, Renato Maino, Luca Molteni, Developing, Validating and Using Internal Ratings (Hoboken,
NJ: John Wiley & Sons, 2010).
Chapter 5 ................................Validating Rating Models
Explain the process of model validation and describe best practices for the roles of internal organizational units in the
validation process.
Compare qualitative and quantitative processes to validate internal ratings, and describe elements of each process.
Describe challenges related to data quality and explain steps that can be taken to validate a models data quality.
Explain how to validate the calibration and the discriminatory power of a rating model.
Michael Crouhy, Dan Galai and Robert Mark, The Essentials of Risk Management, 2nd Edition (New
York: McGraw-Hill, 2014)
Chapter 15.. Model Risk
Identify and explain errors in modeling assumptions that can introduce model risk.
Explain how model risk can arise in the implementation of a model.
Explain methods and procedures risk managers can use to mitigate model risk.
Explain the impact of model risk and poor risk governance in the 2012 London Whale trading loss and the 1998 collapse of
Long Term Capital Management.
Chapter 17. Risk Capital Attribution and Risk-Adjusted Performance Measurement

Define, compare and contrast risk capital, economic capital and regulatory capital, and explain the motivations for using
economic capital.
Compute and interpret the RAROC for a project, loan, or loan portfolio, and use RAROC to compare business unit
performance.
Explain challenges that arise when using RAROC for performance measurement, including choosing a time horizon,
measuring default probability, and choosing a confidence level.
Calculate the hurdle rate and apply this rate in making business decisions using RAROC.
Explain challenges in modeling diversification benefits, including aggregating a firms risk capital and allocating economic
capital to different business lines.
Explain best practices in implementing an approach that uses RAROC to allocate economic capital.
Range of Practices and Issues in Economic Capital Frameworks, (Basel Committee on Banking Supervision
Publication, March 2009).*
o Defining risk measures
o Risk aggregation
o Validation of models
o Dependency modeling in credit risk
o Evaluating counterparty credit risk
o Assessing interest rate risk in the banking book
Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designed
for regulatory purposes.
o Credit portfolio management
o Risk based pricing
o Customer profitability analysis
o Management incentives
Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice,
Board of Governors of the Federal Reserve System, August 2013
Describe the Federal Reserves Capital Plan Rule and explain the seven principles of an effective capital adequacy process
for bank holding companies (BHCs) subject to the Capital Plan Rule.
o Risk identification
o Corporate governance
o Capital policy, including setting of goals and targets and contingency planning
o Stress testing and stress scenario design
o Estimating losses, revenues, and expenses, including quantitative and qualitative methodologies
o Assessing the impact of capital adequacy, including RWA and balance sheet projections
Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Todays Markets, 3rd Edition (New York: Wiley,
2011)
Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2008 credit
crisis.
Describe the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an
auction cycle.

Describe endogenous price approaches to LVaR, their motivation and limitations and calculate the elasticity-based liquidity
adjustment to VaR.
Describe liquidity at risk (LaR) and compare it to VaR, describe the factors that affect future cash flows, and explain
challenges in estimating and modeling LaR.

Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors
to portfolio positions.
Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such
modeling errors could have been avoided.
Explain major defects in model assumptions which led to the underestimation of systematic risk for residential mortgage
backed securities (RMBS) during the 2008-2009 financial downturn

Differentiate between sources of liquidity risk, including balance sheet/ funding liquidity risk, systemic risk funding liquidity
risk and transactions liquidity risk, and explain how each of these risks can arise for financial institutions.
Summarize the asset-liability management process at a fractional-reserve bank , including the process of liquidity
transformation.
Describe specific liquidity challenges faced by money market mutual funds and by hedge funds, particularly in stress
situations.
Compare transactions used in the collateral market and explain risks that can arise through collateral market transactions.
Describe the relationship between leverage and a firm's return profile calculate the leverage ratio and explain the leverage
effect.
Explain the impact on a firms leverage and its balance sheet of the following transactions: purchasing long equity positions
on margin, entering into short sales, and trading in derivatives.
Explain methods to measure and manage funding liquidity risk and transactions liquidity risk.
Calculate the expected transactions cost and spread risk factor for a transaction, and calculate the liquidity adjustment to
VaR for a position to be liquidated over a number of trading days.
Explain interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.
Stress Testing Banks, Til Schuermann, prepared for the Committee on Capital Market Regulation, Wharton
Financial Institutions Center (April 2012).
Compare and contrast the features and scope of stress tests before and after the Supervisory Capital Assessment Program
(SCAP).
Identify and explain challenges in modeling a bank's losses and revenues over a stress test horizon period.
Compare and contrast the 2009 SCAP stress test, the 2011 and 2012 CCAR, and the 2011 EBA Irish and EBA European
stress tests in their methodologies and key findings.
Guidance on Managing Outsourcing Risk, Board of Governors of the Federal Reserve System, December 2013.
Explain how risks can arise through outsourcing activities to third-party service providers, and describe elements of an
effective program to manage outsourcing risk.
Explain how financial institutions should perform due diligence on third-party service providers.
Describe topics and provisions that should be addressed in a contract with a third-party service provider.
John Hull, Risk Management and Financial Institutions, 4th Edition (New York: John Wiley & Sons, 2012)
Chapter 15. Basel I, Basel II, and Solvency II
Explain the motivations for introducing the Basel regulations, including key risk exposures addressed and explain the
reasons for revisions to Basel regulations over time.
Explain the calucation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
Describe and contrast the major elementsincluding a description of the risks coveredof the two options available for the
calculation of market risk:
o Standardised Measurement Method
o Internal Models Approach
Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR.
o Foundation IRB Approach
o Advanced IRB Approach
Describe and contrast the major elements of the three options available for the calculation of operational risk: basic
indicator approach, standardized approach, and the Advanced Measurement Approach.
Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and market
discipline.
o Probability of default (PD)
o Loss given default (LGD)
o Exposure at default (EAD)
o Worst-case probability of default
Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II
framework, and describe the repercussions to an insurance company for breaching the SCR and MCR.
Chapter 16. Basel II.5, Basel III, and Other Post-Crisis Changes
Describe and calulate the stressed value-at-risk measure introduced in Basel 2.5, and calculate the market risk capital
charge.
Explain the process of calculating the incremental risk capital charge for positions held in a bank's trading book.
Define in the context of Basel III and calculate where appropriate

Required Tier 1 equity capital, total Tier 1 capital, and total capital
Describe the motivations for and calculate the capital conservation buffer and the counterycyclical buffer introduced in
Basel III.
Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage ratio,
the liquidity coverage ratio and the net stable funding ratio.
Explain the major changes to the U.S. financial market regulations as a result of Dodd-Frank
Chapter 17. Fundamental Review of the Trading Book

Describe the proposed changes to the Basel market risk capital calculation and the motivations for these changes, and
calculate the market risk capital under this method.
Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank can
calculate its expected shortfall using the various horizons.
Explain proposed modifications to Basel regulations in the following areas:
Classification of positions in the trading book compared to the banking book
Treatment of credit spread and jump-to-default risk, including the incremental default risk charge
Comprehensive Version, (Basel Committee on Banking Supervision Publication, June 2006).*
Basel III: A Global Regulatory Framework for More Resilient Banks and Banking SystemsRevised Version, (Basel
Committee on Banking Supervision Publication, June 2011).*
Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, (Basel Committee on Banking
Supervision Publication, January 2013).*
Revisions to the Basel II Market Risk FrameworkUpdated as of 31 December 2010, (Basel Committee on Banking
Supervision Publication, February 2011).*
"Basel III: the net stable funding ratio." (Basel Committee on Banking Supervision Publication,
October 2014).
Minimum capital requirements for market risk (Basel Committee on Banking Supervision Publication, October
2014).
Andrew Ang, Asset Management: A Systematic Approach to Factor Investing (New York: Oxford University Press,
2014).
Chapter 6Factor Theory
Provide examples of factors that impact asset prices, and explain the theory of factor risk premiums.
Describe the capital asset pricing model (CAPM) including its assumptions, and explain how factor risk is addressed in the
CAPM.
Explain implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk,
its treatment of diversification benefits, and shortcomings of the CAPM.
Describe multifactor models, and compare and contrast multifactor models to the CAPM
Explain how stochastic discount factors are created and apply them in the valuation of assets.
Describe efficient market theory and explain how markets can be inefficient.
Chapter 7Factors
Describe the process of value investing, and explain reasons why a value premium may exist.
Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility,affect risk premiums
and asset returns.
Assess methods of mitigating volatility risk in a portfolio, and describe challenges that arise when managing volatility risk.
Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the FamaFrench model as an
example.
Compare value and momentum investment strategies, including their risk and return profiles.
Chapter 10Alpha
Describe and evaluate the low-risk anomaly of asset returns.
Define and calculate alpha, tracking error, the information ratio, and the Sharpe ratio.
Explain the impact of benchmark choice on alpha, and describe characteristics of an effective benchmark to measure
alpha.
Describe Grinolds fundamental law of active management, including its assumptions and limitations, and calculate the
information ratio using this law.
Apply a factor regression to construct a benchmark with multiple factors, measure a portfolios sensitivity to those factors
and measure alpha against that benchmark.
Explain how to measure time-varying factor exposures and their use in style analysis.
Describe issues that arise when measuring alphas for nonlinear strategies.
Compare the volatility anomaly and beta anomaly, and analyze evidence of each anomaly.
Describe potential explanations for the risk anomaly.
Chapter 13Illiquid Assets

Evaluate the characteristics of illiquid markets.
Describe the unsmoothing of returns and its properties.
Evaluate portfolio choice decisions on the inclusion of illiquid assets
Returns and Controlling Risk, 2nd Edition (New York: McGraw-Hill, 2000).
Assess the impact of practical issues in portfolio construction such as determination of risk aversion, incorporation of
specific risk aversion, and proper alpha coverage.
Describe portfolio revisions and rebalancing and evaluate the tradeoffs between alpha, risk, transaction costs and time
horizon.
Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear
programming, and quadratic programming.
Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marginal
VaR, component VaR, undiversified portfolio VaR, and diversified portfolio VaR.
Explain the risk-minimizing position and the risk and return-optimizing position of a portfolio.
Explain the difference between risk management and portfolio management, and describe how to use marginal VaR in
portfolio management.

Describe the impact of horizon, turnover and leverage on the risk management process in the investment management
industry.
Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding
risk and sponsor risk.
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Approach
(Hoboken, NJ: John Wiley & Sons, 2003).
Describe the use of alpha, benchmark, and peer group as inputs in performance measurement tools.
Describe and distinguish between risk-adjusted performance measures, such as Sharpes measure, Treynors measure,
Jensens measure (Jensens alpha), and information ratio.
Describe the uses for the Modigliani-squared and Treynors measure in comparing two portfolios, and the graphical
representation of these measures.
Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model
and compute return due to market timing.
Describe and apply performance attribution procedures, including the asset allocation decision, sector and security
selection decision and the aggregate contribution.

Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes in the
development of the industry.
Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent
risks of each strategy.
Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and explain the
impact of such a convergence on portfolio diversification strategies.
Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of
assets under management (AUM) in the industry.
Kevin R. Mirabile, Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager
Profits, and Fund Performance (Hoboken, NJ: Wiley Finance, 2013)

Bhme, Rainer; Christin, Nicolas; Edelman, Benjamin; and Tyler Moor, Bitcoin: Economics, Technology, and
Governance. Journal of Economic Perspectives, Vol. 29, No. 2, Spring 2015.
Describe the incentives to use virtual currency.
Identify the limits of Bitcoin and the concerns that may arise from these limits.
Explain and compare the distinctive risks that Bitcoin presents.
Describe the measures taken to regulate virtual currencies.
Dudley, William C, Market and Funding LiquidityAn Overview, Remarks at the Federal Reserve Bank of Atlanta
2016 Financial Markets Conference, Fernandina Beach, Florida, 1 May 2016.
Compare and contrast market and funding liquidity and describe factors that have impacted both types of liquidity.
Describe the regulatory and non-regulatory factors that have affected liquidity.
Describe the link between market and funding liquidity.
Examine the links between funding liquidity and capital requirements.
Chapter 2: Market Liquidity Resilient or Fleeting? International Monetary Fund, Global Financial Stability Report,
October 2015.
Describe the factors that influence the level of market liquidity and the degree of liquidity resilience in markets.
Identify drivers and their effects on market liquidity level and resilience.
Assess the effects that monetary policy has on market liquidity.
Explain how liquidity spillovers can be amplified and describe what effects this has on the market.
Describe the recommendations to bolster the level of market liquidity and its resilience.
Algorithmic Trading Briefing Note, New York Fed, April 2015.
Identify key risks with algorithmic trading.

Describe how risks associated with algorithmic trading are monitored and controlled.
Explain how algorithmic trading activity is captured in banks risk management frameworks.
Assess the effectiveness of risk management tools to monitor risks associated with algorithmic trading.
Morten Bech, Anamaria Illes, Ulf Lewrick, and Andreas Schrimpf, Hanging up the phoneelectronic trading in fixed
income markets and its implications, BIS Quarterly Review, 2016.
Describe how the fixed income markets have been evolving.
Explain the drivers behind the electronification of fixed income markets.
Identify and describe the implications that electronification has on market quality.
Compare the qualifications of traditional instruments of liquidity conditions and the new market environment.
Linnemann Bech, Morten and Aytek Malkhozov, How have central banks implemented negative policy rates? BIS
Quarterly Review, March 6, 2016.
Describe the framework that led to the introduction of negative policy rates.
Explain the implications of the technical implementation of negative policy rates.
Identify factors that determine the lower bound for nominal interest rates.
Identify and compare the risks associated with negative policy rates.
Corporate Debt in Emerging Economies: A Threat to Financial Stability? Committee on International Economic
Policy and Reform, Brookings Institution, September 2015.
Describe the general trends of emerging economics over the past decade.
Examine the risk factors that firms face due to external debt and explain how these risks are transmitted to the financial
system.
Analyze the role of corporate debt in emerging economies using the following case studies:
o External commercial borrowings in India

o Foreign currency lending to Turkish corporates
o Corporate bond issuance in Latin America
Explain the policy implications related to the risks associated with issuance of corporate debt in emerging economies.

P2 2010 Thru 2017 AIM Comparison - v1

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2010 AIMS 2011 Reading #

Market Risk Measurement and Management

Credit Risk Measurement and Management

Adam Ashcroft and Til Schuermann, Understanding the Securitization of Subpr 35

Describe how a credit valuation adjustment is made to an over-the-counter derivatives portfolio.

Discuss major benefits of credit risk transfer.

Studies on credit risk concentration: an overview of the issues and a synopsis of t 44

Operational and Integrated Risk Management

See Line # 527 46

See Line # 947 53

Basel II: International Convergence of Capital Measurement and Capital Standard 54

Robert Litterman and the Quantitative Resources Group, Modern Investment Ma 63

Matches 2010 Line # 708 64

See Line # 795 69

Current Issues in Financial Markets

List differences between prime and subprime mortgages and borrowers.

UBS, Shareholder Report on UBSs Write-Downs, (April 2008).

Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: A Panoramic V 73

Darrell Duffie, The Failure Mechanics of Dealer Banks, (June 2009).

Hull, Options, Futures, and Other Derivatives, 7th Edition. 29.1

Tuckman, Fixed Income Securities, 2nd Edition. 30.1

Chapter 9 ... 30.3

Kevin Dowd, Measuring Market Risk, 2nd Edition. 33.1

Chapter 4 ... 33.2

Chapter 5 ... 33.3

Chapter 7 ... 33.4

CREDIT RISK MEASUREMENT AND MANAGEMENTPart II Exam Weight | 25%

Describe how a credit valuation adjustment is made to an over-the-counter derivatives portfolio.

Chapter 13... 38.2

Chapter 16... 38.3

Chapter 17... 38.4

de Servigny and Renault, Measuring and Managing Credit Risk. 39.1

Hull, Options, Futures, and Other Derivatives, 7th Edition. 40.1

Chapter 23... 40.2

OPERATIONAL AND INTEGRATED RISK MANAGEMENTPart II Exam Weight |

Dowd, Measuring Market Risk, 2nd Edition. 46.1

ion 404 of the Sarbanes-Oxley (SOX) Act of 2002.

n for a financial conglomerate.

tress testing, back testing and benchmarking.

and management of liquidity risk and public disclosure

ve use of risk measures not designed for regulatory purposes.

to complex and illiquid financial instruments.

Developments in Modelling Risk Aggregation (Basel Committee on Banking Supervision Publication, J 57

g Superior Returns and Controlling Risk, 2nd Edition.

allocation and diversification characteristics.

ifts for hedge fund investors.

Matches 2011 Reading # 64

ous hedge fund strategies including

erformance of the funds.

ling bias and valuation.

d institutional investments and regulation.

Matches 2011 Reading # 69

be subject to a risk budget.

erations for maintaining a quality VaR measure.

CURRENT ISSUES IN FINANCIAL MARKETSPart II Exam Weight | 10%

List differences between prime and subprime mortgages and borrowers.

uring the recent market crisis.

ngs for subprime MBS.

cluding hedging and position limit decisions.

lationship between structuring and trading groups.

may arise in large dealer banks.

sks related to large dealer banks.

Hull, Options, Futures, and Other Derivatives, 8th Edition