The FRM Exam Part II Syllabus builds on the tools and skills mastered in Part I and delves deeper into the field of Financial Risk Management, with a focus on real world risk management problems. The format of the exam is 80 multiple choice questions (no negative marking) to be completed in a time frame of 4 hours. Topics covered in this Part are categorized into six sections outlined below (along with their respective weights).
Section 1: Market Risk Measurement and Management (Weightage: 20%)
This section spans a total of 16 readings. At the core, it explores the nuances of computation of Value at Risk(VaR) and Expected Shortfall(ES) via both parametric approaches and non-parametric approaches, and other steps such as VaR Mapping and Backtesting. Also included are advanced risk and valuation topics like Interest Rate Models, Volatility Smiles, Correlation Risk and Extreme Value Theory (EVT).
Section 2: Credit Risk Measurement and Management (Weightage: 20%)
This equally important, challenging and currently relevant facet of risk management has a total of around 20 assigned readings. These can be categorized into four sub-sections that are roughly equally represented in terms of number of readings:
- Introduction
- Introduction to credit risk, credit risk roles and credit derivatives.
- Credit Risk Modeling
- Structural or Merton style models, reduced form or intensity models, factor models and credit scoring models used more in retail banking.
- Counterparty Credit Risk
- Topics covering netting, collateral, exposure calculations, pricing of counterparty credit risk via Credit Valuation Adjustment(CVA) and Wrong Way Risk.
- Structured Finance
- Product features and design of products like Collateralized Debt Obligations (CDOs), market mechanics and structured credit risk.
Section 3: Operational Risk and Resiliency (Weightage: 20%)
This section addresses two areas of increasing importance in current times – operational risk management and operational resiliency. Key areas covered are principles of operational risk management (operational risk framework, calculation of operational risk capital), Enterprise Risk Management(ERM) (risk appetite frameworks, economic capital and allocation, risk adjusted return on capital), model risk, risk culture and operational resiliency. A key sub-section is Regulation and Basel Accords that effectively ties together concepts from Market Risk, Credit Risk and Operational Risk.
Section 4: Liquidity Risk and Treasury Risk (Weightage: 15%)
Newly created as part of curriculum changes in AY 2020, this section focuses on various facets of Liquidity Risk Measurement and Management. Topics included in this section focus on market / transaction liquidity risk, funding liquidity risk, various sources and uses of liquidity (deposits, non-deposit liabilities, repurchase agreements), monitoring of liquidity, liquidity stress testing, reporting and contingency plans. Also included are topics related to asset liability management / management of interest rate risk, cross currency basis and shortage of dollar funding.
Section 5: Risk Management and Investment Management (Weightage: 15%)
This section focuses on risk management techniques applied to Investment Management. Topics include factor theory, application of VaR to estimate portfolio risk and to budget risks across asset classes and managers, portfolio construction, performance measurement and risk monitoring. A couple of readings focus on trading strategies of hedge funds and their due diligence.
Section 6: Current Issues in Financial Markets (Weightage: 10%)
This section is the most dynamic part of the FRM curriculum as the FRM committee strives to keep it current and relevant by including readings and research papers that are of most interest to practitioners in the field.
Making the most of your Part II preparation
In order to achieve the most of your Part II preparation efforts, it is critical to formulate a study plan and stick to it. Your plan should appropriately weigh each of above sections in terms of their relative difficulty and weightage in exam. Additionally, your plan should arrange all readings in Part II in a sequence that helps study related readings together. Please follow the link below to view details pertaining to finRGB’s online preparation course for FRM Exam Part II: