2016

FRM EXAM REVIEW

COVERS
ALL TOPICS
IN PART II

FRMPART II

FORMULA SHEETS
Cover image: Loewy Design
Cover design: Loewy Design
Copyright 2016 by John Wiley & Sons, Inc. All rights reserved.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-119-34824-5
Market Risk Management and Measurement (MR)
Dowd, Chapter 3

Dowd, Chapter 3

VaR = + Z

VaR = ( + Z )Pt 1

VaR = Ppast [1 exp( Z)]

E( R P ) R L
SFRatio =
P

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 Meissner, Chapter 1

Meissner, Chapter 1

2
realized = 2
n n
i, j

2
2
(.3 + .2 + .4) = .3
3 3

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Meissner, Chapter 2

Meissner, Chapter 2

St St 1 = a(S St 1 )

Cov(t , t 1 )
AC(t , t 1 ) =
(t )(t 1 )

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 Meissner, Chapter 3

Meissner, Chapter 3

cov(X, Y)
Correlation =
X Y

6 d 2i
1 .
n(n 2 1)

nc nd
=
n(n 1) / 2

2016 Wiley 5
Meissner, Chapter 4

Meissner, Chapter 4

p = P( Z < ) = ( )

where phi is the standard expression of the cumulative normal distribution and is the log
of the strike we subjectively set where we assume an asset will default.

6 2016 Wiley
 Tuckman, Chapter 6

Tuckman, Chapter 6

DV01N
F R = F N
DV01R

DV01What Im Hedging
FaceValue FirstHedge = FaceValue What Im hedging FirstHedge
FirstHedge
DV01
DV01What Im Hedging
FaceValue SecondHedge = FaceValue What Im hedging SecondHedge
SecondHedge
DV01

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Tuckman, Chapter 7

Tuckman, Chapter 7

r k
1, 000, 000 cmt
2

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 Tuckman, Chapter 9

Tuckman, Chapter 9

dr = dW

dr = dt + dW

dr = k ( r)dt + dW

k ( r0 )
r0 = + /
t dt

dr = k (r r )dt + dt + dw

= k r + r dt + dw
k

r +
k

2016 Wiley 9
Credit Risk Measurement and Management (CR)
 de Servigny and Renault, Chapter 3

de Servigny and Renault, Chapter 3

St = Vt N( k + v T t ) Ke r ( T t ) N( k )

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Stulz, Chapter 18

Stulz, Chapter 18

0 if AT K
D(T, T) = K = K max[K A T , 0]
K A T if AT < K

Value of risky debt = Value of risk-free debt Value of put option on company assets

St = A t N(d1 ) Ke ( ) N(d 2 ) |
r Tt

D(t, T) = A t N(d1 ) + Ke r ( T t) N(d 2 )

Credit spread = yD (t,T) yP(t,T) =

12 2016 Wiley
 Malz, Chapter 6

Malz, Chapter 6

Probability of default = Prob(AT < K) = 1 Prob(AT K) = 1 N(e2)

A 1 2
ln t + u(T t) + 2 (T t)
K
e1 =
Tt
e 2 = e1 T t

Expected loss = KN(e2) Ateu(Tt) N(e1)

Present value of expected loss = KP(t,T) D(t,T)
This simplifies to Ker(Tt) N(d2)AtN(d1)

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Malz, Chapter 7

Malz, Chapter 7

P[ t* < t ] F(t ) = 1 e t

F (t ) = e t

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 Malz, Chapter 8

Malz, Chapter 8

a i = i m + 1 2i i i = 1, 2,...

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Gregory, Chapter 8

Gregory, Chapter 8

n + n(n 1)
Netting factor =
n

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 Gregory, Chapter 12

Gregory, Chapter 12

m
CVA (1 Rec) DF(t i )EE(t i ) PD(t i 1 , t i ).
i =1

F(u) = 1 exp(hu),

Spread
h ,
(1 Recovery)

Spread
F(u) = 1 exp u .
(1 Recovery)

m
CVA Incremental
i = (1 Rec) DF(t j )EE iIncremental (t j1 , t j ) PD(t j1 , t j ).
j=1

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Choudhry, Chapter 12

Choudhry, Chapter 12

CPR = 1 (1 SMM)12

0.2% t, for t 30 months

r=
6.0%, for t > 30 months

N
t Principal received at t
Average life =
t =1 12 ( Total principal )

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Operational and Integrated Risk Management (OR)
Girling, Chapter 12

Girling, Chapter 12

N e d
f (n) =
n!

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 Crouhy, Chapter 17

Crouhy, Chapter 17

Risk Adjusted Return

RAROC =
Risk Adjusted Capital

RAROC R f
ARAROC =
e

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Dowd, Chapter 14

Dowd, Chapter 14

LVaR = [1 + (spread + 1.645 spread ) /2] VaR

1
dS = dt + dW + dN
L

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 Malz, Chapter 12

Malz, Chapter 12

r e = Lr a (L 1)r d

1
(s + 2.33s )
2

(1 + T )(1 + 2T )
6T

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Hull, Chapter 15

Hull, Chapter 15

Max(V, 0) + aL

N M
w i L i + w jC j
i=1 i=1

max(Vart 1 , m c * Varaverage ) + SRC

N 1 (PD i ) + N 1 (0.9999)
WCDR = N
1

EAD * LGD * WCDR

EAD * LGD * PD

EAD * LCG * (WCDR PD) * MA

12.5 * EAD * LCG * (WCDR PD) * MA

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 Hull, Chapter 16

Hull, Chapter 16

m c * VaR ave + m s * VaR stressed

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Risk Management and Investment Management(IM)
 Grinold and Kahn, Chapter 14

Grinold and Kahn, Chapter 14

IR
A =
2. P

SCn MCVA n PCn

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Jorion, Chapter 7

Jorion, Chapter 7

Portfolio VaR = VaR p = p W = xx

VaR VaR p cov(R, R p )

VaR i = = = =
x i w i W w i p

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 Jorion, Chapter 17

Jorion, Chapter 17

R asset = R polic ymix + R active mgt. = w bi R bi + (w i R i Wib R bi )

i i

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Bodie, Kane, and Marcus, Chapter 24

Bodie, Kane, and Marcus, Chapter 24

Rp Rf
Sharpe ratio =
p

Rp Rf
Treynor ratio =
p

p = R p [ R f + p (R m R f )]

N
() =
(e)

30 2016 Wiley
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