Changes FRM p2

2010 AIMS
Market Risk Measurement and Management
John Hull, Options, Futures, and Other Derivatives, 7th Edition (NY: Pearson, 2009).
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 same used to price p
• Relate the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset pr
• Explain why foreign exchange rates are not necessarily lognormally distributed and the implications this can have
• 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 options.
• Explain the impact of the volatility smile on the calculation of the “Greeks”.
• Explain the impact of asset price jumps on volatility smiles.
Chapter 24 - Exotic Options
• 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 into nonstandard A
• 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 options.
Bruce Tuckman, Fixed Income Securities, 2nd Edition (Hoboken, NJ: Wiley & Sons, 2002).
Chapter 6 - Measures of Price Sensitivity Based on Parallel Yield Shifts
• Describe advantages, disadvantages, and limitations of the use of price sensitivities based on parallel shifts of the
• 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 security.
• Define DV01 in terms of Macaulay duration and use this definition to explain and differentiate between the “durati
• 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 - Key Rate and Bucket Exposures
• Describe and analyze the major weakness attributable to single-factor approaches when hedging portfolios or imp
• 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 advantages and disa
• Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a spe
• Discuss some of the considerations in choosing key rates.
• Discuss why hedges based on key rates only approximate an immunized position in the underlying assets.
• 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 interest rate risk
• Explain how key rate and bucket analysis may be applied in estimating portfolio volatility.
Chapter 9 - The Science of Term Structure Models
• Using replicating portfolios develop and use an arbitrage argument to price a call option on a zero-coupon securit
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 extended over mul
• 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-neutral probabil
• Discuss the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on
• Explain why the Black-Scholes-Merton model to value equity derivatives is not appropriate to value derivatives on
• Describe the impact of embedded options on the value of fixed-income securities.
Chapter 21 - Mortgage-Backed Securities
• 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 homeowner’s prepayment option and relate it to a bond’s call option.
• Describe the impact of interest rate changes on the value of the prepayment option and discuss non-interest rate
• Define and describe in the context of mortgages: current coupon rate, due on sale, lock-in effect, points, media ef
• Describe reasons why actual mortgage prepayments behavior may be sub-optimal from a financial valuation pers
• Discuss the main features as well as the advantages and disadvantages of using static cash flow, implied, and pr
• 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-backe
• 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) bon
• Discuss the impact of interest rates and prepayments on different portions of CMOs, IO and PO strips.
Philippe Jorion, Value‐at‐Risk: The New Benchmark for Managing Financial Risk, 3rd Edition
(New York: McGraw-Hill, 2007).
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
• 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 interest-rate swap
• Describe the method of mapping options.
Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: Wiley, 2005).
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 either normal or log
• 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.
Chapter 4 - Non Parametric Approaches
• 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
• 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
• 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: McGraw Hill,2006)
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 including:
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 risk based prici
Frank Fabozzi, Handbook of Mortgage Backed Securities, 6th edition (New York: McGraw Hill,2006)
Chapter 31 - Valuation of Mortgage-Backed Securities
• 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 pro
Credit Risk Measurement and Management
Adam Ashcroft and Til Schuermann, “Understanding the Securitization of Subprime Mortgage
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 the typical borrowe
• 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 securities.
• 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” in ALM of
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 exposure to a co
• 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 counterparties in the deri
Darrell Duffie, “Innovations in Credit Risk Transfer: Implications for Financial Stability” (July
• 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 inv
• 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
o Describe the impact of ineffective pricing and hedging of CDOs, and explain the role of ineffective hedging in the r
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital and Risk
(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 CDSs such
• Describe portfolio credit default swaps, including basket CDS, Nth to Default CDS, Senior and Subordinated Bask
• Discuss the composition and use of iTraxx CDS indices.
• Explain the mechanics of asset default swaps, equity default swaps, total return swaps and credit linked notes.
Chapter 13 - The Structuring Process
• 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 reduction, and satisfa
• 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 distributions and cre
Chapter 16 - Securitization
• 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 purpose entity.
• List and discuss the four guiding principles of FAS140 and the conditions necessary to be a qualified special purp
• 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 h
• Discuss the securitization process for mortgage-backed securities and asset-backed commercial paper.
Chapter 17 - Cash Collateralized Debt Obligations
• 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: McGraw-Hill,2004)
Chapter 3 - Default Risk: Quantitative Methodologies
Describe the Merton model for corporate security pricing, including its assumptions, strengths and weaknesses.
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 value.
o Discuss the results and practical implications of empirical studies that use the Merton model to value debt
Describe the Moody’s KMV Credit Monitor Model to estimate probability of default using equity prices.
o Compare the Moody’s-KMV's equity model with the Merton model.
Discuss credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibility, transparen
Define and differentiate among the following quantitative methodologies for credit analysis and scoring:
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
• 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 estimate of the rec
Chapter 22—Credit Risk
• Identify ratings of Moody’s, Standard & Poors and Fitch that correspond to investment and non-investment grade
• 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 Merton’s 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.
Chapter 23—Credit Derivatives
• 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, market yields, recove
• 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 and Operational Risk: The Valu
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 Merton’s option theoretic model to estimate default probabilities.
• Explain the relationship between the yield spread and the probability of default, and calculate default probability o
• Describe the CreditMetrics and Algorithmics proprietary VaR models for credit risk measurement.
René Stulz, Risk Management & Derivatives (KY: Thomson South-Western, 2002).
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 approach.
• Explain, from a contingent claim perspective, the impact stochastic interest rates have on the valuation of risky bo
• Assess the credit risks of derivatives.
• Discuss the fundamental differences between CreditRisk+, CreditMetrics and KMV credit portfolio models.
• 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 option's value.
• Discuss how to account for credit risk exposure in valuing a swap.
Michael Ong, Internal Credit Risk Models: Capital Allocation and Performance Measurement (London: Risk Books, 2
Chapter 6 - Portfolio Effects: Risk Contributions and Unexpected Losses
• Explain the relationship between expected and unexpected losses for an individual asset and a portfolio of asset.
• Compare expected loss and unexpected loss risk measures.
• Explain how the recovery rate, credit quality, and expected default frequency affect the expected and unexpected
• 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 unexpected loss,
• 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 im
• 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:
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-Hill, 2001).
Chapter 14 - Capital Allocation and Performance Measurement
• Describe the RAROC (risk-adjusted return on capital) methodology and discuss some of the potential benefits of
• Define, compare and contrast economic and regulatory capital.
• Compute and interpret the RAROC for a loan or loan portfolio, and use RAROC to compare business unit perform
• 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 decisions
• Compute the adjusted RAROC for a project to determine its viability.
See Line # 527
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 approach.
• 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 risk.
Chapter 16 - Model Risk
• 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
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-Oxle
• Discuss relationship between the SOX requirements on financial reporting and the Basel requirements on operati
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 conglomerat
• Describe the “hub and spoke” organizational model for risk management of a financial conglomerate.
Brian Nocco and René Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of
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 and the micro
• 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 an
Til Schuermann and Andrew Kuritzkes, “What We Know, Don’t Know and Can’t 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, str
• 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 ass
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
• Describe the factors that a bank should consider in setting assumptions about scenarios.
• Describe the role of supervisors in liquidity risk management.
“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 d
• 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

Readings for Basel Reference - AIMS
“Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised
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 risk:
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 operational risk:
o Basic Indicator Approach
o Advanced Measurement Approach
Describe and contrast the major elements - including a description of the risks covered - of the two options available
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 bank’s 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 finan
• 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 Version”
(Basel Committee on Banking Supervision Publication, July 2009).
• Explain the regulatory reason for incorporating the incremental default risk charge into the trading book capital ca
• 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 in
• 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
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 those used for calc
• Explain and calculate the stressed value-at-risk measure and the frequency which it must be calculated.
• 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.
Risk Management and Investment Management
Grinold and Kahn, Active Portfolio Management: A Quantitative Approach for Producing
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, incorporation of specific r
• Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time hor
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 Contr
Chapter 17 - Performance Analysis
• 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 hypothe
• Define and compute the compound total return, geometric average return, average log return and the arithmetic a
• 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, a
• Describe portfolio-based performance analysis, including the use of performance attribution and performance ana
• Define, describe and calculate active systematic returns, expected active beta returns, active beta surprise, and a
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 diversificatio
• 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 I
• 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.
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 in
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 manager’s skill in performance of hedge funds.
Philippe Jorion, Value‐at‐Risk: The New Benchmark for Managing Financial Risk, 3rd Edition (New York: McGraw-H
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 how to use margin
Philippe Jorion, Value‐at‐Risk: The New Benchmark for Managing Financial Risk, 3rd Edition (New York: McGraw-H
Chapter 17 - VaR and Risk Budgeting in Investment Management
• Define risk budgeting.
• Discuss the impact horizon, turnover and leverage have on the risk management process in the investment mana
• 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 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.
o Define tracking error and information ratio.
René 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 fo
• Describe how hedge funds exploit arbitrage opportunities and can be more effective than mutual funds at making
• 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
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An
Equilibrium Approach (Hoboken, NJ: John Wiley & Sons: 2003).
Chapter 17—Risk 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 q
• 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 a
• Explain how backtesting can be used to calibrate a VaR model.
Matches 2010 Line # 708

Manmohan Singh and James Aitken, “Deleveraging after Lehman—Evidence 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 Lehman’s bankruptcy.
Stephen Dimmock and William Gerken, “Finding Bernie Madoff: Detecting Fraud by
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.
See Line # 795

Current Issues in Financial Markets
Gary Gorton, “The Panic of 2007,” (August 2008).
• 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 c
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 o
• 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 ba
• 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 some of the in
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 d
• Describe and give examples of ways in which the management of liquidity, credit, and market risk differentiated fi
• 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 ri
UBS, “Shareholder Report on UBS’s Write-Downs,” (April 2008).

• Discuss factors that contributed to UBS holding more CDO-related risk over time, including hedging and position
• 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
• Describe shortcomings of the data used by UBS for CDO volatility modeling, the problems caused by a failure to
• Describe shortcomings in UBS’s risk reporting framework including the impact of hedging assumptions on VaR ca
• Discuss mismatches in UBS’s funding/liability framework.
• Discuss problems that derived from UBS’s reliance on external ratings.
• Describe problems related to UBS’s trade approval process and the organizational relationship between structurin
• 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 View of Eight
Centuries of Financial Crises,” (April 2008).
• Describe historical default patterns and their relationship to major domestic macro economic factors, international
• Describe typical default patterns as a function of a nation’s stage of development.
• Explain the factors that may drive serial default patterns amongst sovereign debtors and ways to break these patt
• Discuss the transmission mechanisms that can propagate shocks throughout the sovereign debt market.
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 attenda
• 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 ban
• Discuss various factors that can precipitate or accelerate a liquidity crisis at a dealer bank and what prudent risk m
• 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 b
2011 Reading #
30.1
ng of options on the under

and implied volatility.
30.2
31.1
“price” effect.
31.2
ability techniques.
sure profile.
31.3
31.4
igger mortgage prepayme
in the pricing of mortgage-
st only) and PO (principal o

32.1
32.2
33.1
33.2
33.3
33.4
34.1
34.2
35
d performance of a subpri
36
scuss considerations for
n has credit exposure.
37
of General Motors debt.
38.1
hods, payments to the protect

38.2
vestor demands.
38.3
38.4
39.1
39.2
40.1
40.2
41
sing the credit spread.

42
he risk of default.
43
44
45
46
47.1
47.2
ublished by BIS in February 2003:
ment, and how an operational risk management framework can be designed to help meet both sets of requirements.
48
49
ty risk, operational risk and business risk as known, unknown and unknowable.
erational risk and business risk to bank earnings volatility.
50
51
52
atory purposes.
53
54
of market risk:
56
58
sk and the risks captured

59
60.1
proper alpha coverage.

60.2
eroskedasticity and autocorr
iming return.
alternative to full position disclosure.
61
62.1
management.
62.2
63
tment guidelines, (iii) standard deviation, (iv) beta, and (v) duration.
64
65
66
67
68
69
70
71
part of banks
72
types of perverse behavio
ntial supervision.
market crisis.
uring the recent market crisis.
CDO structure to the underlying assets, and other deficiencies in UBS’s risk measuring and monitoring tools.
73
flows, and political policies
can be taken to mitigate these risks.
74
75
76
77
78
79
80
81
2011 AIMS
MARKET RISK MEASUREMENT AND MANAGEMENT—Part II Exam Weight |
Hull, Options, Futures, and Other Derivatives, 7th Edition.

Chapter 18...
• Relate the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset pric
• Explain the impact of the volatility smile on the calculation of the “Greeks”.
Chapter 24…
• Forward start options
• Compound options
• Chooser and barrier options
• Binary options
• Lookback options
• Shout options
• Asian options
• Exchange options
• Rainbow options
• Basket options
Tuckman, Fixed Income Securities, 2nd Edition.

Chapter 6 ...
• Define DV01 in terms of Macaulay duration and use this definition to explain and differentiate between the "duratio
Chapter 7 ...
• Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a spec
• Explain the main differences between the key rate shift and the bucket shift approach to manage interest rate risks
Chapter 9 ...
• Using replicating portfolios develop and use an arbitrage argument to price a call option on a zero-coupon security
• 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 mult
• Calculate the value of a constant maturity Treasure swap, given an interest rate tree and the risk‐neutral probabilit
• Discuss the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on f
• Explain why the Black‐Scholes‐Merton model to value equity derivatives is not appropriate to value derivatives on
• Describe the impact of embedded options on the value of fixed-income securities.
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 homeowner’s prepayment option and relate it to a bond’s call option.
• Describe the impact of interest rate changes on the value of the prepayment option and discuss non-interest rate f
• Define and describe in the context of mortgages: current coupon rate, due on sale, lock-in effect, points, media eff
• Describe reasons why actual mortgage prepayments behavior may be sub-optimal from a financial valuation persp
• Discuss the main features as well as the advantages and disadvantages of using static cash flow, implied, and pre
• 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-backe
• 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) bon
• 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.
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 historical simulation approach.
• Estimate VaR using a parametric estimation approach assuming that the return distribution is either normal or logn
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, 6th Edition (New York: McGraw-Hill, 2006).
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 pricin
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 pro
CREDIT RISK MEASUREMENT AND MANAGEMENT—Part II Exam Weight | 25%
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
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 cou
• 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 counterparties in the deriv
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 inv
• 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 r
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital and Risk (Hoboken, NJ:
John Wiley & Sons, 2006).
Chapter 12...
• Describe the mechanics of a single named credit default swap (CDS), and discuss particular aspects of CDSs suc
Chapter 13...
• Define and describe the process of tranching and subordination, and discuss the role of loss distributions and cred
Chapter 16...
• 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 purpo
• 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 he
• Discuss the securitization process for mortgage‐backed securities and asset‐backed commercial paper.
Chapter 17...
de Servigny and Renault, Measuring and Managing Credit Risk.

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 Moody’s KMV Credit Monitor Model to estimate probability of default using equity prices:
• Compare the Moody’s‐KMV's equity model with the Merton model
• Discuss credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibility, transpar
• 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
• Define and differentiate the following decision rules:
• Minimum error
• Minimum risk
• Neyman-Pearson
• 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.
Chapter 4 ...
• Seniority
• Industrial sector
• Business cycle
• Collateral
• Jurisdiction
• Discuss the beta distribution approach, kernel modeling, and conditional recovery modeling to estimate of the reco

Chapter 22 ...
• Netting
• Collateralization
• Downgrade triggers
Chapter 23...
• 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 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
Stulz, Risk Management & Derivatives.
Chapter 18...
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 asset.
• Explain the different impact diversifiable and un-diversifiable risk has on portfolio expected and unexpected loss, r
“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 imp
• 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 MANAGEMENT—Part II Exam Weight |
Chapter 14...
• Describe the RAROC (risk-adjusted return on capital) methodology and discuss some of the potential benefits of i
• 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 Supervision
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
• 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.

Chapter 14...
• Describe the challenges of estimating liquidity-adjusted VaR (LVaR).
Chapter 16...
• Incorrect model specification
• Incorrect model application
• Implementation risk
• Incorrect calibration
• Programming and data problems
S in February 2003:
an operational risk management framework can be designed to help meet both sets of requirements.
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.
Brian Nocco and René 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 l
onal risk and business risk as known, unknown and unknowable.
nd business risk to bank earnings volatility.
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.
• 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 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.
• 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 Operational
Risk Modeling Techniques.” Ch. 10 in Mark Carey and René 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
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 attendan
• Explain how diseconomies of scope in risk management and corporate governance may arise in large dealer bank
• Discuss policy measures that could alleviate some of the firm-specific and systemic risks related to large dealer ba
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).
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 elements—including a description of the risks covered—of the two options available
• Standardised Measurement Method
• Internal Models Approach
Define in the context of Basel II and calculate where appropriate:
• 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
“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.
• 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-cyc
• 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 stab
“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
“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 cal
• 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 inc
• 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 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 calcu
“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.
RISK MANAGEMENT AND INVESTMENT MANAGEMENT—Part II Exam Weight | 15%
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 ri
• Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time hori
• Discuss the optimal no-trade region for rebalancing with transaction costs
• Screens
• Stratification
• Linear programming
• Quadratic programming
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 hypothe
• Define and compute the compound total return, geometric average return, average log return and the arithmetic a
• 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, a
• Describe portfolio-based performance analysis, including the use of performance attribution and performance ana
• Define, describe and calculate active systematic returns, expected active beta returns, active beta surprise, and a
ull position disclosure.
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.
Matches 2011 Reading # 64

Chapter 7 ...
• Explain the difference between risk management and portfolio management, and demonstrate how to use margina
Chapter 17...
• 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
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

es, (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 in
• 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 manager’s skill in performance of hedge funds.
Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz, “Trust and Delegation”, May 28, 2010.
• 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 e
• 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.
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 asset’s liquidity.
• Explain the process of estimating the risk premium associated with illiquidity (illiquidity premia) using autocorrelatio
• 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.
• 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 ris
• Explain how autocorrelation of returns can be used as a measure of liquidity of the asset.
Chapter 6 ...
Michelle McCarthy
• Identify practices that can decrease the validity of a VaR measure and discuss considerations for maintaining a qu
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 MARKETS—Part 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 co
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
• 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 ban
• 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 ins
market crisis.
to the underlying assets, and other deficiencies in UBS’s risk measuring and monitoring tools.
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
• Describe typical default patterns as a function of a nation’s stage of development.
• Explain the factors that may drive serial default patterns amongst sovereign debtors and ways to break these patte
• Discuss the transmission mechanisms that can propagate shocks throughout the sovereign debt market.
2011 Reading # 53
o mitigate these risks.
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 opac
“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 O’Kelly, “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 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.
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 common
• 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 p
• Discuss the importance of effective supervisory oversight and engagement by stakeholders as it relates to the evo
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 as
• 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”.
Examiner’s Report on Lehman, Appendix 8 (pages 1-49). Copy available at: www.GARPDigitalLibrary.org
• Describe the role of Lehman’s risk committee .
• Discuss the functions and responsibilities of Lehman’s risk management group.
• Discuss Lehman’s 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
• Explain the role of the Consolidated Supervised Entities Program and how it fit with the SEC’s regulation of Lehma
• Explain the situation arising from Lehman’s public filings on “Other Measures of Risk”.
• Discuss the inconsistencies brought forth regarding Lehman board’s risk committee during the examination.
2012 Reading #
29.1
g of options on the underl

nd implied volatility.
29.2
30.1
price" effect.
30.2
bility techniques.
ure profile.
30.3
31
gger mortgage prepayments.
n the pricing of mortgage-backed securities.
t only) and PO (principal only) strips.

32.1
32.2
33.1
33.2
33.3
33.4
34.1
34.2
34.3
35
performance of a subpri
36
cuss considerations for a
has credit exposure.
of General Motors debt.
37
38.1
ethods, payments to the pro

38.2
vestor demands.
38.3
38.4
39.1
39.2
40.1
40.2
41
ng the credit spread.

42
e risk of default.
43
44
45
ory purposes.
46.1
46.2
47.1
47.2
47.3
47.4
48
49
50
51
52
can be taken to mitigate t

53
n of market risk:
54
and the use of monitoring metrics.
55
56
k and the risks captured b

57
58
oper alpha coverage.

eroskedasticity and autocorrelation, inclusion of benchmark timing and style analysis, and controlling for size and value.
ming return.
59
60.1
management.
60.2
61
62
63.1
63.2
63.3
64
65
66
67
68
ment guidelines, (iii) stand

art of banks.
ypes of perverse behavior they can induce.
ntial supervision.
ows, and political policies.
collateralization.
69
70
ation practices.
s and those used for reporting .
71
72
73.1
73.2
73.3
2012 AIMS
Hull, Options, Futures, and Other Derivatives, 8th Edition

Chapter 19…
• Relate the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset pric
• Explain the impact of the volatility smile on the calculation of the “Greeks.”
Chapter 25…
• Binary options
• Shout options
• Asian options
• Rainbow options
• Basket options
Tuckman, Fixed Income Securities, 2nd Edition.

Chapter 6 ...
• Define DV01 in terms of Macaulay duration and use this definition to explain and differentiate between the “duratio
Chapter 7 ...
• Calculate the key rate exposures for a given security, and compute the appropriate hedging positions given a spec
• Explain the main differences between the key rate shift and the bucket shift approach to managing interest rate ris
Chapter 9
• Using replicating portfolios, develop and use an arbitrage argument to price a call option on a zero-coupon securit
• 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 mult
• Calculate the value of a constant maturity Treasure swap, given an interest rate tree and the risk‐neutral probabilit
• Discuss the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on f
• Explain why the Black-Scholes-Merton model to value equity derivatives is not appropriate to value derivatives on
• 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 ma
• 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
• Identify, describe, and contrast different standard prepayment measures.
• Describe the effective duration and effective convexity of standard MBS instruments and the factors that affect the
• 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
prepayments.
mortgage-backed securities.
(principal only) strips.

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 logn
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 severi
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
• 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 nom
• 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.
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.
• Explain the structure of the securitization process of subprime mortgage loans.
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 cou
• 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 counterparties in the deriv
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 thei
• Explain how a bank can hedge its credit risk; with particular focus on relevant risk sensitivities, the asset/liability si
• Explain friction costs, wrong-way risks, out-of-the-money risks, netting and collateral, and other credit risk mitigant
• 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 suc
Chapter 13...
• Define and describe the process of tranching and subordination, and discuss the role of loss distributions and cred
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.
• Discuss the securitization process for mortgage backed securities and asset backed commercial paper.
Chapter 17...
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 Moody’s KMV Credit Monitor Model to estimate probability of default using equity prices:
• Compare the Moody’s‐KMV's equity model with the Merton model.
• Discuss credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibility, transpar
• Linear discriminant analysis
• Parametric discrimination
• Knearest neighbor approach
• Support vector machines
• Define and differentiate the following decision rules:
• Minimum error
• Minimum risk
• Neyman-Pearson
• 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.
Chapter 4 ...
• Seniority
• Industrial sector
• Business cycle
• Collateral
• Jurisdiction
• Discuss the beta distribution approach, kernel modeling, and conditional recovery modeling to estimate of the reco

Chapter 23 ...
• Netting
• Collateralization
• Downgrade triggers
Chapter 24...
• 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
Stulz, Risk Management & Derivatives.
Chapter 18...
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 the different impact diversifiable and un-diversifiable risk has on portfolio expected and unexpected loss, r
Chapter 14...
• Describe the RAROC (risk-adjusted return on capital) methodology and discuss some of the potential benefits of i
“Range of practices and issues in economic capital modeling” (Basel Committee on Banking Supervision
Publication, March 2009). Copy available at: www.GARPDigitalLibrary.org
• Discuss the constraints imposed and the opportunities offered by economic capital within the following areas:
• Management incentives

Chapter 14...
Chapter 16...
• Incorrect model specification
• Incorrect model application
• Implementation risk
• Incorrect calibration
• Programming and data problems
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 René 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 l
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 René 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.
Candidates, after completing this reading, should be able to:
• Discuss policy measures that could alleviate some of the firm-specific and systemic risks related to large dealer ba
Readings for Basel Reference
Comprehensive Version” (Basel Committee on Banking Supervision Publication, June 2006).
• Describe the key elements of the three pillars of Basel II:
• 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:
• Describe and contrast the major elements of the three options available for the calculation of operational risk:
• Describe and contrast the major elements—including a description of the risks covered—of the two options availab
• Define in the context of Basel II and calculate where appropriate:
• Capital ratio
• Capital charge
• Risk weights and risk-weighted assets
• Maturity (M)
• Stress tests
• 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 us
• Discuss changes designed to dampen the procyclical amplification of financial shocks and to promote countercyclic
• Describe changes intended to improve the management 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
“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 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 ri
• Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time hori
• Discuss the optimal no-trade region for rebalancing with transaction costs.
• Screens
• Stratification
• Linear programming
• Quadratic programming
and autocorrelation, inclusion of benchmark timing and style analysis, and controlling for size and value.
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 ...
Chapter 17...
• 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
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
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:
• Sharpe’s measure
• Treynor’s measure
• Jensen’s measure
• Information ratio
• Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios, and the graphica
• 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 f
• 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 compa
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 e
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 Madoff’s feeder funds.
• Explain how the securities fraud at BMIS was caught.
• Discuss the operational red flags at BMIS conflicting with the investment profession’s 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 asset’s liquidity.
• Explain the process of estimating the risk premium associated with illiquidity (illiquidity premia) using autocorrelatio
• 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.
Chapter 6 ...
Michelle McCarthy
• Identify practices that can decrease the validity of a VaR measure and discuss considerations for maintaining a qu
e behavior they can induce.
cal policies.
Gregory Connor, Thomas Flavin, and Brian O’Kelly, “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. Rusnak’s 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
• Describe recommendations for improving the control environment at AIB/Allfirst.
ed 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 evolv
• Explain what the quiet period of U.S. banking system was and discuss what regulations should be adopted that wi
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 th
• Understand the three methods (Event Study, Noise-to-Signal Ratio, and Receiver Operating Characteristic (ROC)
• 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 w
• 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
• Describe issues related to estimated probabilities relevant to tail risk management.
ng of options on the underlying asset.
nd implied volatility.
“price” effect.
ability techniques.
sure profile.
he mortgages underlying the MBS.
d performance of a subprime loan.
scuss considerations for applying such a model to various market instruments.
has credit exposure.
nd systematic/idiosyncratic components.
ethods, payments to the protection seller, reference name, ownership, recovery rights, trigger events, accrued interest and liqu
vestor demands.
sing the credit spread.
he risk of default.
atory purposes.
can be taken to mitigate these risks.
on of market risk:
gs, and the use of leverage ratios
sk and the risks captured by the Value-at-Risk model.

management.
of these measures.
tment guidelines, (iii) standard deviation, (iv) beta, and (v) duration.
ard to risk, regulatory, and operational practices.
banking system panic.
eration the shadow banking system.
dit aggregates to predict a financial crisis and interpret their results.

age them in the future.
s, accrued interest and liquidity.
2013 Reading
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30
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2013 AIMS
Hull, Options, Futures, and Other Derivatives, 8th Edition.Hull, Options, Futures, and Other Derivatives, 8th Edition.
Chapter 19...............................Volatility SmilesChapter 19...............................Volatility SmilesChapter 19.................

• Define volatility smile and volatility skew.• Define volatility smile and volatility skew.• Define volatility smile and vola
• Explain how put-call parity indicates that the implied volatility used to price call options is the same used to price pu
• Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset p
• Explain why foreign exchange rates are not necessarily lognormally distributed and the implications this can have o
• Describe the volatility smile for equity options and give possible explanations for its shape.
• Describe alternative ways of characterizing the volatility smile.• Describe alternative ways of characterizing the vola
• Explain the impact of asset price jumps on volatility smiles.• Explain the impact of asset price jumps on volatility sm
Chapter 25 ..............................Exotic OptionsChapter 25 ..............................Exotic OptionsChapter 25 ....................

• Define and contrast exotic derivatives and plain vanilla derivatives.• Define and contrast exotic derivatives and plai
• Explain how any derivative can be converted into a zero-cost product.• Explain how any derivative can be converte
• Identify and describe how various option characteristics can transform standard American options into nonstandard
• Identify and describe the characteristics and pay-off structure of:• Identify and describe the characteristics and pay
• Binary options
• Shout options
• Asian options
• Rainbow options
• Basket options
Tuckman, Fixed Income Securities, 3rd Edition.Tuckman, Fixed Income Securities, 3rd Edition.Tuckman, Fixed Inco
Chapter 7 ................................The Science of Term Structure ModelsChapter 7 ................................The Science of

• 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 portfol
• 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 explain how it is used in option pricing.• Define risk-neutral pricing and explain how i
• 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 multip
• Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the risk‐neutral probabiliti
• Describe the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on
• Explain why the Black‐Scholes‐Merton model used in valuing equity derivatives is not appropriate to value derivativ
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 Jensen’s inequality.• Calculate the convexity effect using Jensen’s inequality.
• Calculate the price and return of a zero coupon bond incorporating a risk premium.
Chapter 9 ................................The Art of Term Structure Models: DriftChapter 9 ................................The Art of Term
• Describe the process and effectiveness of the following models, and construct a tree for a short-term rate using the
• A model with normally distributed rates and no drift (Model 1)• A model with normally distributed rates and no drift (
• A model incorporating drift (Model 2)• 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 normally
• 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 drif
• 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 Mode
• Calculate the Vasicek Model rate change, standard deviation of the change of the rate, expected rate in T years, a
• 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 rate
• Describe the effectiveness of time-dependent volatility models.• Describe the effectiveness of time-dependent vola
• 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.
• Summarize the application of a lognormal model with deterministic drift and a lognormal model with mean reversio
Chapter 8 ................................Basics of Residential Mortgage Backed Securities
• Describe the impact on a MBS of the weighted average maturity, the weighted average coupon, and the speed of p
• 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• Pass-through
• CMOs, both sequential and planned amortization class• CMOs, both sequential and planned amortization class
• Interest only and principal only strips• Interest only and principal only strips• Interest only and principal only strips
Chapter 6 ................................Backtesting VaRChapter 6 ................................Backtesting VaRChapter 6 ...............
• Explain the significant difficulties in backtesting a VaR model.• Explain the significant difficulties in backtesting a Va
• Define and identify type I and type II errors.• Define and identify type I and type II errors.• Define and identify type I
• Describe the Basel rules for backtesting.• Describe the Basel rules for backtesting.• Describe the Basel rules for ba
Chapter 11................................VaR MappingChapter 11................................VaR MappingChapter 11......................

• Explain how the mapping process captures general and specific risks.• Explain how the mapping process captures
• Map a fixed income portfolio into positions of standard instruments.• Map a fixed income portfolio into positions of s
• Describe how mapping of risk factors can support stress testing.• Describe how mapping of risk factors can suppor
• Explain how VaR can be used as a performance benchmark.• Explain how VaR can be used as a performance ben
• Describe the method of mapping forwards, commodity forwards, forward rate agreements, and interest rate swaps
• Describe the method of mapping options.• Describe the method of mapping options.• Describe the method of mapp
Kevin Dowd, Measuring Market Risk, 2nd Edition.Kevin Dowd, Measuring Market Risk, 2nd Edition.
Chapter 3 ................................Estimating Market Risk MeasuresChapter 3 ................................Estimating Market R
• 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 logn
• Calculate the expected shortfall given P/L or return data.• Calculate the expected shortfall given P/L or return data.
• Define coherent risk measures.• Define coherent risk measures.• Define coherent risk measures.• Define coherent
• Describe the use of QQ plots for identifying the distribution of data.• Describe the use of QQ plots for identifying the
Chapter 4 ................................Non-parametric ApproachesChapter 4 ................................Non-parametric Approach

• Describe historical simulation using non-parametric density estimation.• Describe historical simulation using non-pa
• Describe the following weighted historic simulation approaches:• Describe the following weighted historic simulatio
• Age-weighted historic simulation• Age-weighted historic simulation• Age-weighted historic simulation• Age-weighte
• Volatility-weighted historic simulation• Volatility-weighted historic simulation• Volatility-weighted historic simulation
• Correlation-weighted historic simulation• Correlation-weighted historic simulation• Correlation-weighted historic sim
• Filtered historical simulation• Filtered historical simulation• Filtered historical simulation• Filtered historical simulatio
• Describe the advantages and disadvantages of non-parametric estimation methods.
Chapter 5 ................................Appendix—Modeling Dependence: Correlations and Copulas

• Explain the drawbacks of using correlation to measure dependence.• Explain the drawbacks of using correlation to
• Describe how copulas provide an alternative measure of dependence.• Describe how copulas provide an alternativ
• Identify basic examples of copulas.• Identify basic examples of copulas.• Identify basic examples of copulas.
• Explain how tail dependence can be investigated using copulas• Explain how tail dependence can be investigated
Chapter 7 ................................Parametric Approaches (II): Extreme Value

• Describe extreme value theory (EVT) and its use in risk management.• Describe extreme value theory (EVT) and i
• 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.
• Describe the parameters of a generalized Pareto (GP) distribution.• Describe the parameters of a generalized Pare
• Explain the importance of multivariate EVT for risk management.• Explain the importance of multivariate EVT for ri
Frank Fabozzi, Anand Bhattacharya, William Berliner, Mortgage-Backed Securities, 3rd Edition (Hoboken, NJ: John
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.• Calculate the mortgage paymen
• Explain credit and default risk analysis of mortgages, including metrics for delinquencies, defaults, and loss severit
Chapter 2 ................................Overview of the Mortgage-Backed Securities Market

• Describe the evolution of the MBS market.• Describe the evolution of the MBS market.• Describe the evolution of th
• Explain the creation of agency (fixed rate and adjustable rate) and private-label MBS pools, pass-throughs, CMOs,
• Explain how a loan progresses from application to agency pooling.• Explain how a loan progresses from application
• 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 MBSChapter 10...............................Techniques for Valuing M

• Calculate the static cash flow yield of a MBS using bond equivalent yield (BEY) and determine the associated nom
• Define reinvestment risk.• Define reinvestment risk.• Define reinvestment risk.• Define reinvestment risk.• Define re
• 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 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
• Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of
• Describe exogenous and endogenous liquidity risk and explain how they might be integrated into VaR models inclu
• Assess VaR, Expected Shortfall, Spectral, and other identified risk measures.
• Summarize the recent state of stress testing research and practice.• Summarize the recent state of stress testing r
• Compare unified versus compartmentalized risk measurement.• Compare unified versus compartmentalized risk m
• 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 leverage
Adam Ashcroft and Til Schuermann, “Understanding the Securitization of Subprime Mortgage Credit,” Federal Rese
• Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of each
• Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrowe
• 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.• Compare the difference between predatory len
Christopher Culp, Structured Finance and Insurance: The Art of Managing Capital and Risk (Hoboken, NJ: John Wil
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 suc
• Describe portfolio credit default swaps, including basket CDS, Nth to Default CDS, Senior and Subordinated Baske
• Describe the composition and use of iTraxx CDS indices.• Describe the composition and use of iTraxx CDS indices
Chapter 13...............................The Structuring ProcessChapter 13...............................The Structuring Process

• Describe the process and benefits of ring-fencing assets.• Describe the process and benefits of ring-fencing assets
• Describe the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and satisfa
• Define and describe the process of tranching and subordination, and describe the role of loss distributions and cre
Chapter 16...............................SecuritizationChapter 16...............................SecuritizationChapter 16........................
• 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 example
• Describe the securitization process for mortgage backed securities and asset backed commercial paper.
Chapter 17...............................Cash Collateralized Debt ObligationsChapter 17...............................Cash Collateraliz

• 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 the types
• Describe cash flow vs. market value CDOs.• Describe cash flow vs. market value CDOs.• Describe cash flow vs. m
• Describe static vs. managed portfolios of CDOs.• Describe static vs. managed portfolios of CDOs.
de Servigny and Renault, Measuring and Managing Credit Risk.de Servigny and Renault, Measuring and Managing
Chapter 3 ................................Default Risk: Quantitative MethodologiesChapter 3 ................................Default Risk:
• Using the Merton model, calculate the value of a firm’s 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 Moody’s KMV Credit Monitor Model to estimate probability of default using equity prices, and compar
• Describe credit scoring models and the requisite qualities of accuracy, parsimony, non-triviality, feasibility, transpar
• Linear discriminant analysis• Linear discriminant analysis• Linear discriminant analysis• Linear discriminant analysi
• Parametric discrimination• Parametric discrimination• Parametric discrimination• Parametric discrimination• Parame
• K nearest neighbor approach• K nearest neighbor approach• K nearest neighbor approach• K nearest neighbor ap
• Support vector machines• Support vector machines• Support vector machines• Support vector machines• Support
• Define and differentiate the following decision rules: minimum error, minimum risk, Neyman-Pearson and Minimax.
• Identify the problems and tradeoffs between classification and prediction models of performance.
• Describe important factors in the choice of a particular class of model.• Describe important factors in the choice of
Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons, 2011).
Chapter 6 ................................Credit and Counterparty RiskChapter 6 ................................Credit and Counterparty
• Describe securities with different types of credit risks, such as corporate debt, sovereign debt, credit derivatives, an
• Differentiate between book and market values for a firm’s 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, an
• 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 risk mo
• Define counterparty risk, describe its different aspects and explain how it is mitigated.
• Describe how counterparty risk is different from credit risk.• Describe how counterparty risk is different from credit r
• Describe the Merton Model, and use it to calculate the value of a firm, the values of a firm’s debt and equity, and d
• Explain the drawbacks and assess possible improvements to the Merton Model, and identify proprietary models of
• 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).• Define
Chapter 7 ................................Spread Risk and Default Intensity Models

• Define the different ways of representing spreads. Compare and differentiate between the different spread conven
• Define and compute the Spread ‘01.• 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 probabilities
• 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.• Explain how a CDS spread can be used to
• Construct a hazard rate curve from a CDS spread curve.• Construct a hazard rate curve from a CDS spread curve
• Construct a default distribution curve from a hazard rate curve.• Construct a default distribution curve from a hazar
• 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.• Define default correla
• 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 health
• Compute the variance of the conditional default distribution and the conditional probability of default using a single-
• Explain the relationship between the default correlation among firms and their single-factor model beta parameters
• Explain how Credit VaR of a portfolio is calculated using the single-factor model, and how correlation affects the di
• 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 stru
• Describe the role of capital structure and credit losses in a securitization.
• Evaluate a waterfall example in a securitization with multiple tranches.• Evaluate a waterfall example in a securitiza
• Identify the key participants in a securitization, and describe some conflicts of interest that can arise in the process
• Evaluate one or two iterations of interim cashflows in a three tiered securitization structure including the final cashf
• Describe a simulation approach to calculating credit losses for different tranches in a securitization of a portfolio of
• Explain how the probability of default and default correlation among the underlying assets of a securitization affect
• 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.• Define implied correlation and describe how it ca
• Identify the motivations for using structured credit products.• Identify the motivations for using structured credit pro
Jon Gregory, Counterparty Credit Risk: The New Challenge for Global Financial Markets (West Sussex, UK: John W
Chapter 2 ................................Defining Counterparty Credit RiskChapter 2 ................................Defining Counterpar
• Define counterparty risk and explain how it differs from lending risk.• Define counterparty risk and explain how it dif
• Identify types of transactions that carry counterparty risk.• Identify types of transactions that carry counterparty risk
• Explain some ways in which counterparty risk can be mitigated.• Explain some ways in which counterparty risk can
• Define the following terminology related to counterparty risk: credit exposure, credit migration, recovery, mark-to-m
• Describe the different ways institutions can manage counterparty risk.• Describe the different ways institutions can
• Describe the drawbacks of relying on triple-A rated, “too-big-to-fail” institutions as a method of managing counterpa
• 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 co
• Define the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exp
Chapter 3 ................................Mitigating Counterparty Credit RiskChapter 3 ................................Mitigating Counterp

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

• Explain the following techniques used to quantify credit exposure: add-ons, semi-analytical methods, and Monte C
• Describe the Monte Carlo simulation technique for quantifying exposure, and explain the choice of risk “hotspots” o
• Identify typical exposure profiles for the following security types: loans, bonds, repos, swaps, FX, options, and cred
• 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 in cre
• Describe the parameters used in simple single-factor models of the following security types: equities, FX, commod
• Describe how netting is modeled.• Describe how netting is modeled.• Describe how netting is modeled.• Describe h
• Define and calculate the netting factor.• Define and calculate the netting factor.• Define and calculate the netting fa
• 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 distributio
• 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 o
• Explain the relevant risks involved as a result of entering into a collateral agreement.
Chapter 7 ................................Pricing Counterparty Credit Risk, IChapter 7 ................................Pricing Counterpart
• 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.• Describe the process of approximating the CVA spread.
• Define and calculate the incremental CVA and the marginal CVA.• Define and calculate the incremental CVA and t
• Describe how collateralization and netting affect the CVA price.• Describe how collateralization and netting affect th
• Explain challenges in pricing CVA arising from the presence of exotic products and the issue of path dependency.
• 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.• Explain issues that need to be considered in pr
René Stulz, Risk Management & Derivatives (Florence, KY: Thomson South-Western, 2002).
Chapter 18...............................Credit Risks and Credit DerivativesChapter 18...............................Credit Risks and C
• Explain, from a contingent claim perspective, the impact stochastic interest rates have on the valuation of risky bon
• Assess the credit risks of derivatives.• 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 option’s value.
• Explain how to account for credit risk exposure in valuing a swap.• Explain how to account for credit risk exposure
Chapter 14...............................Capital Allocation and Performance Measurement
• Describe the RAROC (risk-adjusted return on capital) methodology and describe some of the potential benefits of i
• Define, compare and contrast economic and regulatory capital.• Define, compare and contrast economic and regul
• Compute and interpret the RAROC for a loan or loan portfolio, and use RAROC to compare business unit performa
• Explain how capital is attributed to market, credit, and operational risk.• Explain how capital is attributed to market,
• Calculate the capital charge for market risk and credit risk.• Calculate the capital charge for market risk and credit r
• Compute the adjusted RAROC for a project to determine its viability.• Compute the adjusted RAROC for a project t
“Range of Practices and Issues in Economic Capital Frameworks,” (Basel Committee on Banking Supervision Public
• Defining risk measures• Defining risk measures• Defining risk measures• Defining risk measures• Defining risk me
• Risk aggregation• Risk aggregation• Risk aggregation• Risk aggregation• Risk aggregation• Risk aggregation• Risk
• Validation of models• Validation of models• Validation of models• Validation of models• Validation of models• Valida
• 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• Evaluat
• 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 de
• Describe the constraints imposed and the opportunities offered by economic capital within the following areas:
• Credit portfolio management• Credit portfolio management• Credit portfolio management• Credit portfolio managem
• Risk based pricing• Risk based pricing• Risk based pricing• Risk based pricing• Risk based pricing• Risk based pric
• Customer profitability analysis• Customer profitability analysis• Customer profitability analysis• Customer profitabilit
• Management incentives• Management incentives• Management incentives• Management incentives• Management
Dowd, Measuring Market Risk, 2nd Edition.Dowd, Measuring Market Risk, 2nd Edition.Dowd, Measuring Market Ris
Chapter 14...............................Estimating Liquidity RisksChapter 14...............................Estimating Liquidity Risks
• Define liquidity risk and describe factors that influence liquidity.• Define liquidity risk and describe factors that influe
• 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.• Define exogenous and
• Describe the challenges of estimating liquidity-adjusted VaR (LVaR).• Describe the challenges of estimating liquidit
• 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 RiskChapter 16...............................M

• Define model risk; identify and describe sources of model risk.• Define model risk; identify and describe sources of
• Describe the challenges involved with quantifying model risk.• Describe the challenges involved with quantifying m
• Identify ways risk managers can protect against model risk.• Identify ways risk managers can protect against mode
• Summarize the role of senior managers in managing model risk.• Summarize the role of senior managers in manag
• Describe procedures for vetting and reviewing a model.• Describe procedures for vetting and reviewing a model.
• Explain the function of an independent risk oversight (IRO) unit.• Explain the function of an independent risk oversi
Malz, Financial Risk Management: Models, History, and Institutions.Malz, Financial Risk Management: Models, Hist
Chapter 11, Section 1.1...........Assessing the Quality of Risk MeasuresChapter 11, Section 1.1...........Assessing the
• Describe ways that errors can be introduced into models.• 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 estima
• 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 how s
• Identify the two major defects in model assumptions which led to the underestimation of systematic risk for residen
Chapter 12...............................Liquidity and LeverageChapter 12...............................Liquidity and Leverage
• Define and differentiate between sources of liquidity risk, including transactions liquidity risk, balance sheet/funding
• 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, an
• Explain specific liquidity issues faced by money market mutual funds.• Explain specific liquidity issues faced by mo
• Describe the economics of the collateral market and explain the mechanics of the following transactions using colla
• Calculate a firm’s leverage ratio, describe the formula for the leverage effect, and explain the relationship between
• Compute a firm’s leverage and construct a firm’s balance sheet given the following types of transactions: purchasin
• 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 an emp
Brian Nocco and René Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of Applied Corporate Fin
• Define enterprise risk management (ERM).• Define enterprise risk management (ERM).• Define enterprise risk ma
• Explain how implementing ERM practices and policies create shareholder value both at the macro and the micro le
• Explain how an ERM program can be used to determine the right amount of risk.
• Describe the development and implementation of an ERM system.• Describe the development and implementation
• Explain the relationship between economic value and accounting performance.
• Describe the role of and issues with correlation in risk aggregation.• Describe the role of and issues with correlation
• 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 Risk
• Describe the loss distribution approach to measuring operational risk.• Describe the loss distribution approach to m
• 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 Operatio
• Describe the nature of operational loss distributions.• Describe the nature of operational loss distributions.
• Explain the consequences of working with heavy tailed loss data.• Explain the consequences of working with heav
• 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.
• Identify factors that can precipitate or accelerate a liquidity crisis at a dealer bank and what prudent risk manageme
• Compare a liquidity crisis at a dealer bank to a traditional bank run.• Compare a liquidity crisis at a dealer bank to a
• Describe policy measures that could alleviate some of the firm-specific and systemic risks related to large dealer b
“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).Publication, June 2
• 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 re
• Summarize the eleven fundamental principles of operational risk management as suggested by the Basel committe
• Evaluate the role of the Board of Directors as well as senior management in implementing an effective operational
• 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 add
• Evaluate 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, Dec
• Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits
• Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors
• 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 comm
• Explain the benefits to a firm from having a robust risk data infrastructure, and describe key elements of an effectiv
• 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 Assessm
• 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 in mo
• 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— Comp
• Describe the key elements of the three pillars of Basel II:• Describe the key elements of the three pillars of Basel II
• Minimum capital requirements• Minimum capital requirements• Minimum capital requirements• Minimum capital req
• Supervisory review• Supervisory review• Supervisory review• Supervisory review• Supervisory review• Supervisory
• Market discipline• Market discipline• Market discipline• Market discipline• Market discipline• Market discipline• Mark
• Describe the major risk categories covered by the Basel II Accord.• Describe the major risk categories covered by
• Standardised Approach• Standardised Approach• Standardised Approach• Standardised Approach• Standardised
• Foundation IRB Approach• Foundation IRB Approach• Foundation IRB Approach• Foundation IRB Approach• Foun
• Advanced IRB Approach• Advanced IRB Approach• Advanced IRB Approach• Advanced IRB Approach• Advanced
• Basic Indicator Approach• Basic Indicator Approach• Basic Indicator Approach• Basic Indicator Approach• Basic In
• Standardised Approach• Standardised Approach• Standardised Approach• Standardised Approach• Standardised
• Advanced Measurement Approach• Advanced Measurement Approach• Advanced Measurement Approach
• Standardised Measurement Method• Standardised Measurement Method• Standardised Measurement Method
• Internal Models Approach• Internal Models Approach• Internal Models Approach• Internal Models Approach• Intern
• Define in the context of Basel II and calculate where appropriate:• Define in the context of Basel II and calculate wh
• Capital ratio• Capital ratio• Capital ratio• Capital ratio• Capital ratio• Capital ratio• Capital ratio• Capital ratio• Capita
• Capital charge• Capital charge• Capital charge• Capital charge• Capital charge• Capital charge• Capital charge• Ca
• Risk weights and risk-weighted assets• Risk weights and risk-weighted assets• Risk weights and risk-weighted ass
• Tier 1 capital and its components• Tier 1 capital and its components• Tier 1 capital and its components• Tier 1 cap
• Probability of default (PD)• Probability of default (PD)• Probability of default (PD)• Probability of default (PD)• Proba
• Loss given default (LGD)• Loss given default (LGD)• Loss given default (LGD)• Loss given default (LGD)• Loss giv
• Exposure at default (EAD)• Exposure at default (EAD)• Exposure at default (EAD)• Exposure at default (EAD)• Exp
• Maturity (M)• Maturity (M)• Maturity (M)• Maturity (M)• Maturity (M)• Maturity (M)• Maturity (M)• Maturity (M)• Matur
• Stress tests• Stress tests• Stress tests• Stress tests• Stress tests• Stress tests• Stress tests• Stress tests• Stress t
• Concentration risk• Concentration risk• Concentration risk• Concentration risk• Concentration risk• Concentration ri
• Residual risk
“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems—Revised Version,” (Bas
• 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 us
• Explain changes designed to dampen the procyclical amplification of financial shocks and to promote countercyclic
• Describe changes intended to improve the handling of systemic risk.• Describe changes intended to improve the h
“Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring,” (Basel Committee
on Banking Supervision Publication, December 2010).on Banking Supervision Publication, December 2010).
• Define and describe the minimum liquidity coverage ratio.• Define and describe the minimum liquidity coverage rat
• 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• Contractual matur
• Concentration of funding• Concentration of funding• Concentration of funding• Concentration of funding• Concentra
• Available unencumbered assets• Available unencumbered assets• Available unencumbered assets• Available une
• Liquidity coverage ratio by significant currency• Liquidity coverage ratio by significant currency• Liquidity coverage
• Market related monitoring tools• Market related monitoring tools• Market related monitoring tools• Market related m
“Revisions to the Basel II Market Risk Framework—Updated as of 31 December 2010,” (Basel Committee on Bankin
• Describe the objectives for revising the Basel II market risk framework.• Describe the objectives for revising the Ba
• Define the capital charge for specific risk and general market risk.• Define the capital charge for specific risk and ge
• Explain and calculate the stressed Value-at-Risk measure and the frequency which it must be calculated.
• Explain and calculate the market risk capital requirement.• Explain and calculate the market risk capital requiremen
• Describe the regulatory guidance on prudent valuation of illiquid positions
“Operational Risk—Supervisory Guidelines for the Advanced Measurement Approaches,” (Basel Committee on Ban
• Define gross loss and net loss and identify which specific items should be included or excluded in gross loss comp
• Describe the process and considerations suggested by the Basel committee for a bank to use in determining a loss
• Describe the four data elements which are required to compute a bank’s operational risk capital charge per the Ba
• Define an operational risk management framework (ORMF) and an operational risk measurement system (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, neces
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 describ
• Explain the difference between the Basel II/III and the Solvency II frameworks for the capture of diversification ben
• Explain the difference between Basel II/III and the Solvency II frameworks with respect to: 1) risk classes and capit
• Compare and contrast the Basel II/III and Solvency II frameworks with respect to qualitative risk management aspe
• 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 R
Chapter 14...............................Portfolio ConstructionChapter 14...............................Portfolio Construction
• Identify the inputs to the portfolio construction process.• Identify the inputs to the portfolio construction process.
• Describe the motivation and methods for refining alphas in the implementation process.
• Describe neutralization and methods for refining alphas to be neutral.• Describe neutralization and methods for refi
• Describe the implications of transaction costs on portfolio construction.• Describe the implications of transaction co
• Explain practical issues in portfolio construction such as determination of risk aversion, incorporation of specific ris
• Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time horiz
• Describe the optimal no-trade region for rebalancing with transaction costs.
• Screens• Screens• Screens• Screens• Screens• Screens• Screens• Screens• Screens• Screens• Screens• Screen
• Stratification• Stratification• Stratification• Stratification• Stratification• Stratification• Stratification• Stratification• Stra
• Linear programming• Linear programming• Linear programming• Linear programming• Linear programming• Linear
• Quadratic programming• Quadratic programming• Quadratic programming• Quadratic programming• Quadratic pro
• Describe dispersion, explain its causes and describe methods for controlling forms of dispersion.
Chapter 7 ................................Portfolio Risk: Analytical MethodsChapter 7 ................................Portfolio Risk: Analy
• Explain the role of correlation has on portfolio risk.• Explain the role of correlation has on portfolio risk.
Chapter 17...............................VaR and Risk Budgeting in Investment Management

• Define risk budgeting.• 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 managem
• Describe the risk management challenges with hedge funds.• Describe the risk management challenges with hedg
• Define and describe the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk,
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Approac
Chapter 17...............................Risk Monitoring and Performance Measurement
• Describe risk budgeting and the role of quantitative methods.• Describe risk budgeting and the role of quantitative m
• Describe risk monitoring and its role in an internal control environment.• Describe risk monitoring and its role in an
• Identify sources of risk consciousness within an organization.• Identify sources of risk consciousness within an org
• Describe the objectives of a risk management unit in an investment management firm.
• Explain the importance of liquidity considerations for a portfolio.• Explain the importance of liquidity considerations
• Describe the objectives of performance measurement.• Describe the objectives of performance measurement.
• Describe common features of a performance measurement framework• Describe common features of a performan
Chapter 13...............................Empirical Evidence on Security ReturnsChapter 13...............................Empirical Evid
• Interpret the expected return-beta relationship implied in the CAPM, and describe the methodologies for estimating
• Describe the two-stage procedure employed in early tests of the CAPM and explain the concerns related to these e
• Describe and interpret Roll’s critique to the CAPM, as well as expansions of Roll’s critique.
• Describe the methodologies for correcting measurement error in beta, and explain historical test results of these m
• Explain the test of the single-index models that accounts for human capital, cyclical variations and nontraded busin
• 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 model
• 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 EvaluationChapter 24..............................Portfolio Performance

• 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 Sharpe’s measure, Treynor’s measure, Jense
• 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 the difficulties in measuring the per
• 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 option
• Describe style analysis.• Describe style analysis.• Describe style analysis.• Describe style analysis.• Describe style
• Describe the asset allocation decision.• Describe the asset allocation decision.• Describe the asset allocation decis
David P. Stowell, An Introduction to Investment Banks, Hedge Funds, and Private Equity (Academic Press, 2010).
Chapter 11................................Overview of Hedge FundsChapter 11................................Overview of Hedge Funds
• Describe the common characteristics attributed to hedge funds, and how they differentiate from standard mutual fu
• 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.• Assess academic research on hedge fund performance.
• Explain how hedge funds helped progress the financial markets.• Explain how hedge funds helped progress the fin
• 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.• Compare hedge funds to private equity and mutual fund
• Describe funds of funds and provide arguments for and against using them as an investment vehicle.
Chapter 12...............................Hedge Fund Investment StrategiesChapter 12...............................Hedge Fund Invest

• Describe equity-based strategies of hedge funds and their associated execution mechanics, return sources and co
• 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 arbitr
• Describe the mechanics of an arbitrage strategy using an example.• Describe the mechanics of an arbitrage strate
• 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, distressed i
Chapter 16...............................Overview of Private EquityChapter 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.• Describe the key characteristics of a private equity
• Identify the key participants in a private equity transaction and the roles they play.
• Identify and describe methods of funding private equity transactions.• Identify and describe methods of funding priv
• 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 compan
G. Constantinides, M. Harris and R. Stulz. eds., Handbook of the Economics of Finance, Volume 2B (Oxford: Elsevi
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 fu
• Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes in
• Describe the different hedge fund strategies, explain their return characteristics, and describe the inherent risks of
• Describe the historical performance trend of hedge funds compared to equity indices, and evaluate statistical evide
• Describe the market events which resulted in a convergence of risk factors for different hedge fund strategies, and
• 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 towards g
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 ev
Greg N. Gregoriou and François-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 Madoff’s feeder funds.• Describe the returns reported on Madoff’s 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 profession’s standard practices.
• Describe investment red flags that demonstrated inconsistencies in BMIS’ investment style.
Andrew W. Lo, “Risk Management for Hedge Funds: Introduction and Overview,” Financial Analysts Journal,
Vol. 57., No. 6 (Nov to Dec, 2001), pp. 16-33.Vol. 57., No. 6 (Nov to Dec, 2001), pp. 16-33.Vol. 57., No. 6 (Nov to D

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 to
• 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 cris
• Describe the economic condition of the European financial sector in 2012, and explain some possible policy implem
Li Lian Ong and Martin Čihák, “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 Ice
• Explain how the weighting of shocks in short-term assets and short-term liabilities are adjusted in stress tests that
• Contrast the stress test methods of the Financial Supervisory Authority (FME) and Sedlabanki, and compare their
• 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 On
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 of
Kansas City’s 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 process.
• Describe ideal conditions and situations where simple decision making strategies can outperform complex rule sets
• Summarize the evolution of regulatory structures and regulatory responses to financial crises, and explain criticism
• Compare the effectiveness of simple and complex capital weighting structures in predicting bank failure given sma
• Compare the results provided by simple and complex statistical models in estimating asset returns and portfolio Va
• 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 Myr
• 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 significant issues related to risk in the sa
• 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 research.
• 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 fragmentation, an
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
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73
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75
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77
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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 p
options on the underlying asset.
• Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied v
• Describe the volatility smile for equity options and foreign currency options and give possible explanations for its sh
Chapter 25 ..............................Exotic Options

•• Describe how
Identify and standard
describe theAmerican optionsand
characteristics canpay-off
be transformed into
structure of nonstandard
the American
following exotic options.
options: forward start, compou
lookback, shout, Asian, exchange, rainbow, and basket options.
Bruce Tuckman, Fixed Income Securities, 3rd Edition (Hoboken, NJ: John Wiley & Sons, 2011).
Chapter 7 ................................The Science of Term Structure Models

• 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.
• 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 probabiliti
• Describe the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on
• 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.
Chapter 9 ................................The Art of Term Structure Models: Drift
• Construct and describe the effectiveness of a short term interest rate tree assuming normally distributed rates, bot
• Calculate the short-term rate change and standard deviation of the rate change using a model with normally distrib
• 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 the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model
• Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and hal
• 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
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
• Describe the impact on a MBS of the weighted average maturity, the weighted average coupon, and the speed of p
mortgages underlying the MBS.
• 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
• CMOs, both sequential and planned amortization class
• 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 adva
• 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.
• Map a fixed income portfolio into positions of standard instruments.
• Describe how mapping of risk factors can support stress testing.
• 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)
Chapter 3 ................................Estimating Market Risk Measures
• Calculate VaR using a historical simulation approach.
• Calculate VaR using a parametric estimation approach assuming that the return distribution is either normal or logn
• Calculate the expected shortfall given P/L or return data.
Chapter 4 ................................Non-parametric Approaches

• Describe the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical simulation ap
• Describe the advantages and disadvantages of non-parametric estimation methods.
Chapter 5 ................................Appendix—Modeling Dependence: Correlations and Copulas


• 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 severit
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,
• 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-spre
• 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 m
• 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
Paper, No. 19, Jan 2011.
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.
• Summarize the recent state of stress testing research and practice.
• 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 lev
John Hull and Alan White, “LIBOR vs. OIS: The Derivatives Discounting Dilemma,” April 2013. Forthcoming in the Jo
Management.
• Describe Overnight Indexed Swaps (OIS) and explain the characteristics of the OIS rate which could make it prefe
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 w
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 Rese
Reports, no. 318, (March 2008).*
mortgage problems.
• Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrowe
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, ex
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 l
Chapter 13...............................The Structuring Process

• Describe the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and satisfa
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 ent
• 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
• Describe the securitization process for mortgage backed securities and asset backed commercial paper.
Chapter 17...............................Cash Collateralized Debt Obligations

• 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

Chapter 3 ................................Default Risk: Quantitative Methodologies
• Using the Merton model, calculate the value of a firm’s 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, para
nearest neighbor approach, and support vector machines.
• Differentiate between the following decision rules: minimum error, minimum risk, Neyman-Pearson and Minimax.
• Identify the problems and tradeoffs between classification and prediction models of performance.
• Describe important factors in the choice of a particular class of model.
Chapter 6 ................................Credit and Counterparty Risk
• Describe the credit risks associated with different types of securities.
• Differentiate between book and market values in a firm’s 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
• 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 risk mo
• Describe counterparty risk, compare counterparty risk to credit risk, and explain how counterparty risk can be mitig
• Describe the Merton Model, and use it to calculate the value of a firm, the values of a firm’s debt and equity, and d
• Explain the drawbacks of and assess possible improvements to the Merton Model.
• Describe credit factor models and evaluate an example of a single-factor 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.
• Calculate risk-neutral default rates from spreads.
• Explain how a CDS spread can be used to derive a hazard rate curve.
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 proc
• 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.
• Define implied correlation and describe how it can be measured.
• Identify the motivations for using structured credit products.
Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial M
Sussex, UK: John Wiley & Sons, 2012).
Chapter 3 ................................Defining Counterparty Credit Risk
• 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 giv
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 disadvan
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 link
• Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collate
Chapter 8. ...............................Credit Exposure

• Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, po
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 th
exposure.
• Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on e
• 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 i
contracts.
• Explain the various approaches for estimating price: historical data approach, equity based approach, and risk neu
• 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.
René Stulz, Risk Management & Derivatives (Florence, KY: Thomson South-Western, 2002)
Chapter 18...............................Credit Risks and Credit Derivatives
• 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
default.
• Describe a credit derivative, credit default swap, and total return swap.
• Explain how to account for credit risk exposure in valuing a 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 performa
“Range of Practices and Issues in Economic Capital Frameworks,” (Basel Committee on Banking Supervision Public
• Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not de
purposes.
• Describe the constraints imposed and the opportunities offered by economic capital within the following areas:
• Management incentives

Chapter 14...............................Estimating Liquidity Risks
• 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.
• Explain the role of liquidity in crisis situations and describe approaches to estimating crisis liquidity risk.
Chapter 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 how horizon, computational and modeling decisions can impact VaR estimates.
• Identify challenges related to mapping of risk factors to positions in making VaR calculations.
have been avoided.
• Identify two major defects in model assumptions which led to the underestimation of systematic risk for residential
(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/ fundin
risk.
• 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 leveraged buyouts, merger arbitrage hed
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 colla
securities lending, and total return swaps.
• Calculate a firm's leverage ratio, describe the formula for the leverage effect, and explain the relationship between
on equity.
• Explain the impact on a firm’s leverage and its balance sheet of the following transactions: purchasing long equity p
into short sales, and trading in derivatives.
• 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.
Brian Nocco and René Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of Applied Corporate Fin
20.*
• Explain how implementing ERM practices and policies can create shareholder value both at the macro and the mic
• 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.
Mo Chaudhury, “A Review of the Key Issues in Operational Risk Capital Modeling,” The Journal of Operational Risk,
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 distr
• 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 Operatio
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 an
• Describe characteristics of a strong risk data aggregation capability and explain how these characteristics interact
• 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 associate
• Identify factors that can cause a liquidity crisis at a dealer bank and explain how to mitigate these risks.
• Compare a liquidity crisis at a dealer bank to a traditional bank run.
• 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 re
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 st
committee recommendations.
• Describe the elements of a framework for operational risk management.
• 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, Dec
• Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits to
developed RAF.
• Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors
implementation of an effective RAF.
• Explain the role of a RAF in managing the risk of individual business lines within a firm.
• 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 effectiv
at a firm.
• Describe factors which could lead to poor or fragmented IT infrastructure at an organization.
Til Schuermann. “Stress Testing Banks,” April 2012.*
• Explain the differences in the features and scope of stress tests before and after the Supervisory Capital Assessm
• 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 l
• 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
methodologies and key findings.
Readings for Regulatory Reference
“Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework— Comp
Committee on Banking Supervision Publication, June 2006).*
• Describe the key elements of the three pillars of Basel II:
• Describe the major risk categories covered by the Basel II Accord.
market risk:
• Capital ratio
• Capital charge
• Maturity (M)
• Stress tests
• Residual risk
“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems—Revised Version,” (Bas
Supervision Publication, June 2011).*
• 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 valuation adjustments, the use
use of leverage ratios
• Explain changes designed to dampen the procyclical amplification of financial shocks and to promote countercyclic
of monitoring metrics.
“Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools,” (Basel Committee on Banking Supervis
2013).*
• Define and describe the minimum liquidity coverage ratio.
• Describe the characteristics of high quality liquid assets (HQLA) and operational requirements for assets to qualify
• Differentiate between Level 1, Level 2A, and Level 2B assets, and define the respective cap for each asset class a
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 ban
“Revisions to the Basel II Market Risk Framework—Updated as of 31 December 2010,” (Basel Committee on Bankin
February 2011).*
risks captured by the value-at-risk model.
“Operational Risk—Supervisory Guidelines for the Advanced Measurement Approaches,” (Basel Committee on Ban
June 2011).*
• Define gross loss and net loss and identify which specific items should be included or excluded in gross loss comp
committee.
• Describe the process and considerations suggested by the Basel committee for a bank to use in determining a loss
• Describe the four data elements which are required to compute a bank's operational risk capital charge per the Bas
framework.
• Define an operational risk management framework (ORMF) and an operational risk measurement system (ORMS)
between a bank’s 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, neces
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 describ
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 ben
• Explain the difference between Basel II/III and the Solvency II frameworks with respect to: 1) risk classes and capit
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 aspe
risk management process, governance, and supervision.
• 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 Re
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.
• Describe the implications of transaction costs on portfolio construction.
• Explain practical issues in portfolio construction such as determination of risk aversion, incorporation of specific ris
coverage.
• Describe portfolio revisions and rebalancing and the tradeoffs between alpha, risk, transaction costs and time horiz
• 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.
• Describe dispersion, explain its causes and describe methods for controlling forms of dispersion.
Chapter 7 ................................Portfolio Risk: Analytical Methods
• Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR,
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 Va

• Describe the impact of horizon, turnover and leverage on the risk management process in the investment managem
• 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,
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 Approac
& Sons, 2003).
• 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.
• Identify sources of risk consciousness within an organization.
• 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.
• Explain the importance of liquidity considerations for a portfolio.
• 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 Profi
(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 fund’s risk management process.
• Explain how due diligence can be performed on a fund’s operational environment.
• Explain how a fund’s business model risk and its fraud risk can be assessed.
• Describe elements that can be included as part of a due diligence questionnaire.
Chapter 24..............................Portfolio Performance Evaluation
• 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 Sharpe’s measure, Treynor’s mea
(Jensen’s alpha), and information ratio.
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 and apply performance attribution procedures, including the asset allocation decision, sector and security
aggregate contribution.
G. Constantinides, M. Harris and R. Stulz. eds., Handbook of the Economics of Finance, Volume 2B
(Oxford: Elsevier, 2013).
• 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
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 in
• 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 exp
convergence on portfolio diversification strategies.
• Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concen
management (AUM) in the industry.
Andrew W. Lo, “Risk Management for Hedge Funds: Introduction and Overview,” Financial Analysts Journal,
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 asset’s 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 Corz
• Explain how the risk exposure at MF Global changed during Jon Corzine’s leadership.
• Explain the frictions associated with Corzine’s requests to increase MF Global’s European repurchase-to-maturity p
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 captur
RTM positions.
• Explain the increasing liquidity demands on MF Global and the company’s response to these demands.
• Describe the net capital rule and the effects of the capital charge imposed by FINRA, and summarize the events of
“JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses—Executive Summary,” U.S. Sen
Subcommittee on Investigations, April 2013.*
• Summarize the “London Whale” trades in JP Morgan’s Structured Credit Portfolio (SCP) between 2008 and mid-20
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 ho
method differed from the SCP’s 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
• 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
took place at the bank.
• Explain how investors, regulators, and the public were misinformed about the nature, activities, and riskiness of the
"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
• Describe recent market trends which have encouraged market participants to consider changing reference interest
• 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 cha
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 Singapor
clearing of OTC derivatives, requirements of central counterparties, margin requirements for uncleared OTC derivati
backloading of existing OTC contracts.
• Describe the requirements for reporting derivative transactions to trade repositories in the United States, European
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 governme
• Explain the mechanics of risk transmission from government bonds to SCDS and vice versa, and discuss empirica
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; ex
ban as well as its criticisms.
• Explain how the benefit of SCDS central counterparties can address the risks of naked short-selling without the ne
“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 Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy
companies (BHC’s) 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 a
• 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
• 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 cris
• Describe the economic condition of the European financial sector in 2012, and explain how policy implementation c
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 MANAGEMENT—Part 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 lognorm
· Calculate the 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.

· Describe the bootstrap historical simulation approach to estimating coherent risk measures.
· Describe historical simulation using non-parametric density estimation.
· Distinguish among the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical simula
· Describe the advantages and disadvantages of non-parametric estimation methods.
Chapter 7 ................................Parametric Approaches (II): Extreme Value [MR–3]

• 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: Mc

· Define backtesting and exceptions and explain the importance of backtesting VaR models.
· Explain the significant difficulties in backtesting a VaR model.
· Describe the process of model verification based on 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.

· Explain the principles underlying VaR mapping, 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.
· Summarize how to map a fixed income portfolio into positions of standard instruments.
· Describe 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, forward rate agreements, interest rate swaps, and options.
“Messages from the Academic Literature on Risk Measurement for the Trading Book,” Basel Committee on
Working Paper, No. 19, Jan 2011.
· Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time
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.

· Summarize the recent state of stress testing research and practice.
· 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
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 model’s
· Assess the Pearson correlation approach, Spearman’s rank correlation, and Kendall’s t, and evaluate their limitations and us
Chapter 4 ……………….Financial Correlation Modeling – Bottom-Up Approaches (Sections 4.3.0 (intro), 4.3.1
· 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 Gaus
Chapter 6……………………Empirical 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.

· 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 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.
· Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple p
· 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.
· Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed
· 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
· 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 Jensen's inequality.
· Calculate the price and return of a zero coupon bond incorporating a risk premium.

· Construct and describe the effectiveness of a short term interest rate tree assuming normally distributed rates, both wi
· Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed
· Describe methods for addressing the possibility of negative short-term rates in term structure models.
· 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
· 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 determine the behavior of the standard deviation of the rate change using a m
volatility.
· Assess the efficacy 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 9……………………OIS 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.

· Define volatility smile and volatility skew.
· 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
on the underlying asset.
· Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volati
· Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its sh
· Describe alternative ways of characterizing the volatility smile.
· Describe volatility term structures and volatility surfaces and how they may be used to price options.
· Explain the impact of the volatility smile on the calculation of the “Greeks.”
· Explain the impact of asset price jumps on volatility smiles.
Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook (Hoboken, NJ: John Wiley & Son
· 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, expos
and time horizon,
· Compare bank failure and bank insolvency.

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

· Describe the Merton model for corporate security pricing, including its assumptions, strengths and weaknesses:
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 value
o 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, paramet
neighbor approach, and support vector machines.
· Differentiate between the following decision rules: minimum error, minimum risk, Neyman-Pearson and Minimax.
· Identify the problems and tradeoffs between classification and prediction models of performance.
· Describe important factors in the choice of a particular class of model.
· Explain the relationship between credit spreads, time to maturity, and interest rates.
· Explain the differences between valuing senior and subordinated debt using a contingent claim approach.
· Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equ
· Assess the credit risks of derivatives.
· Describe a credit derivative, credit default swap, and total return swap.
· Explain how to account for credit risk exposure in valuing a swap.
Allan Malz, Financial Risk Management: Models, History, and Institutions (Hoboken, NJ: John Wiley & Sons,
· Describe the credit risks associated with different types of securities.
· Differentiate between book and market values in a firm’s 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, a
· 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 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 firm’s debt and equity, and defau
· Explain the drawbacks of and assess possible improvements to the Merton Model.
· Describe credit factor models and evaluate an example of a single-factor 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.
· 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 probabilities.
· 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.
· 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 Risk (Sections 8.1, 8.2, 8.3 only)

· Define default correlation for credit portfolios.
· Identify drawbacks in using the correlation-based credit portfolio framework.
· 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

· 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.
· Define implied correlation and describe how it can be measured.
· Identify the motivations for using structured credit products
Jon Gregory, Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Fin
Edition (West Sussex, 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.
· 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
· Identify and describe the different ways institutions can manage and mitigate counterparty risk

· Explain the purpose of an ISDA master agreement.
· Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantage
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
· 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
· 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, potenti
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 de
exposure.
· Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on expo
· 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.

· 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 p
· Compare the various approaches for estimating price: historical data approach, equity based approach, and risk neutra
· 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).

· 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.
· Evaluate 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

· Describe wrong-way risk and contrast it with right-way risk.
· Identify examples of wrong-way risk and examples of right-way risk.
· 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
Chapter 13...............................The Structuring Process

· Describe the objectives of structured finance and explain the motivations for asset securitization.
· Describe the process and benefits of ring-fencing assets.
· Describe the role of structured finance in venture capital formation, risk transfer, agency cost reduction, and satisfactio
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 hed
· Describe the securitization process for mortgage backed securities and asset backed commercial paper
Chapter 17...............................Cash Collateralized Debt Obligations

· 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,” Fede
York Staff Reports, no. 318, (March 2008).*
· Explain the subprime mortgage credit securitization process in the United States.
· Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of each fact
problems.
· Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower a
· 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 portfolio management.
· Compare predatory lending and borrowing.
· 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 respon
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 struct
recommendations.
· Describe the elements of a framework for operational risk management.
· 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 address
· Describe the Basel committee's suggestions for managing technology risk and outsourcing risk.
Brian Nocco and René Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of Applied Corpo
(2006): 8–20.*
· Define enterprise risk management (ERM).
· Explain how implementing ERM practices and policies can create shareholder value both at the macro and the micro le
· Explain how a company can determine its optimal amount of risk through the use of credit rating targets.
· Describe the development and implementation of an ERM system.
· Explain the relationship between economic value and accounting performance.
· Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firm’s market ris
risk distributions.
· Distinguish between regulatory and economic capital.
· Explain the use of economic capital in the corporate decision making process.
“Observations on Developments in Risk Appetite Frameworks and IT Infrastructure,” Senior Supervisors Gr
· Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits to a fir
RAF.
· Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors in the d
· Explain the role of a RAF in managing the risk of individual business lines within a firm.
· 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
firm.
· 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.
Philippa X. Girling, Operational Risk Management: A Complete Guide to a Successful Operational Risk Fram
Wiley & Sons, 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 t
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 bound
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 t
external data vendors.
Chapter 12… Capital Modeling

· Compare the basic indicator approach, the standardized approach and the alternative standardized approach for calcul
capital 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 distributi
for probability distributions.
· Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9 th percentile of
distribution.
· 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 bank’s operational risk capital charge.
“Operational Risk—Supervisory Guidelines for the Advanced Measurement Approaches,” (Basel Committee
Publication, June 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) a
management system (ORMS), including the use test and experience.
· Describe key guidelines for the selection of a bank's Operational Risk Categories (ORCs).
· Describe commonly used distributions used to model the frequency and severity of a bank’s operational loss events.
· Explain key guidelines for modeling the distribution of individual ORCs, including the selection of thresholds, necessary
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
categories.
· Describe the four required data elements in an AMA model and the guidelines for combining data from each element in
· Describe the RAROC (risk-adjusted return on capital) methodology and its benefits.
· Define, compare and contrast economic and regulatory capital.
· Compute and interpret the RAROC for a loan or loan portfolio, and use RAROC to compare business unit performance.
· 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 decisions.
· Compute the adjusted RAROC for a project to determine its viability.
“Range of Practices and Issues in Economic Capital Frameworks,” (Basel Committee on Banking Supervisio
2009).*
· Within the economic capital implementation framework describe the challenges that appear in:
o Risk aggregation
· Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designe
· Describe the constraints imposed and the opportunities offered by economic capital within the following areas:
o Management incentives
“Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Pract
of the Federal Reserve System, August 2013
· Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy proce
· Describe practices which can result in a strong and effective capital adequacy process for a BHC in the following areas:
o Risk identification
o Internal controls, including model review and validation
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
· Assessing the impact of capital adequacy, including RWA and balance sheet projections
Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Today’s Markets, 3rd Edition (New York: W
Chapter 12…………Repurchase 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 managemen
· 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 c
· 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 a
· 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 the challenges of estimating liquidity-adjusted VaR (LVaR).
· Describe and calculate LVaR using the constant spread approach and the exogenous spread approach.
· 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 cha
modeling LaR.
· Explain the role of liquidity in crisis situations and describe approaches to estimating crisis liquidity risk.
Chapter 16...............................Model Risk

· Define model risk; identify and describe sources of model risk.
· Describe the challenges involved with quantifying model risk, and explain quantitative methods for estimating model ri
in a financial model.
· Identify ways risk managers can manage and mitigate model risk.
· Summarize the role of senior managers in managing model risk.
· Describe procedures for vetting and reviewing a model.
· Explain the function of an independent risk oversight (IRO) unit.

· Describe ways that errors can be introduced into models.
· Describe how horizon, computational and modeling decisions can impact VaR estimates.
· Identify challenges related to mapping of risk factors to positions in making VaR calculations.
· Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such
been avoided.
· Identify two major defects in model assumptions which led to the underestimation of systematic risk for residential mo

· Define and differentiate between sources of liquidity risk, including transactions liquidity risk, balance sheet/ funding liq
· 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 leveraged buyouts, merger arbitrage hedge fu
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 collatera
securities lending, and total return swaps.
· Calculate a firm's leverage ratio, describe the formula for the leverage effect, and explain the relationship between leve
equity.
· Explain the impact on a firm’s leverage and its balance sheet of the following transactions: purchasing long equity positi
short sales, and trading in derivatives.
· 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.
· Describe the major lines of business in which dealer banks operate and the risk factors they face in each line of busines
· Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.
· Compare a liquidity crisis at a dealer bank to a traditional bank run.
· Describe policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.

· Compare and contrast the features and scope of stress tests before and after the Supervisory Capital Assessment Progr
· 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
intermediate risk factors.
· 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 European st
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 elements—including a description of the risks covered—of the two options available fo
risk:
· Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR
guideline.
· Describe and contrast the major elements of the three options available for the calculation of credit risk:
· Describe and contract the major elements of the three options available for the calculation of operational risk: basic ind
standardized approach, and the Advanced Measurement Approach.
· Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and marke
· Define in the context of Basel II and calculate where appropriate:

o Worst-case probability of default
· Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II
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
· Explain the process of calculating the incremental risk capital charge for positions held in a bank’s 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:
o Required 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 B
· Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage rati
ratio, and 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.
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 and Marke
· Describe and contrast the major elements of the three options available for the calculation of credit risk: Standardised
Approach and Advanced IRB Approach
· Describe and contrast the major elements of the three options available for the calculation of operational risk: Basic In
Standardised Approach and Advanced Measurement Approach.
risk: Standardised Measurement Method and Internal Models Approach
· Capital ratio
· Tier 1 capital and its components
· Loss given default (LGD)
· Maturity (M)
· Concentration risk
· Capital charge
· Probability of default (PD)
· Exposure at default (EAD)
· Stress tests
· Residual risk
“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems—Revised Version
Banking Supervision Publication, June 2011).*
· Describe reasons for the changes implemented through the Basel III framework.
· Describe changes to the regulatory capital framework, including changes to:
o The measurement, treatment, and calculation of Tier 1 and Tier 2 capital
o Risk coverage, the use of stress tests, the treatment of counter-party risk with credit valuation adjustments, the use of ext
leverage ratios
· Explain changes designed to dampen the procyclical amplification of financial shocks and to promote countercyclical bu
· 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 fu
monitoring metrics.
“Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools,” (Basel Committee on Banking
January 2013).*
· Define and describe the minimum liquidity coverage ratio.
· Describe the characteristics of high quality liquid assets (HQLA) and operational requirements for assets to qualify as HQ
· Differentiate between Level 1, Level 2A, and Level 2B assets, and define the respective cap for each asset class as a perc
· 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 Framework—Updated as of 31 December 2010,” (Basel Committee on
Publication, February 2011).*
· 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 those used for calculatin
captured by the value-at-risk model.
· Explain and calculate the stressed value-at-risk measure and the frequency which it must be calculated.
· 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.
Richard Grinold and Ronald Kahn, Active Portfolio Management: A Quantitative Approach for Producing Su
Controlling Risk, 2nd 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.
· Describe neutralization and methods for refining alphas to be neutral.
· Describe the implications of transaction costs on portfolio construction.
· Assess the impact of practical issues in portfolio construction such as determination of risk aversion, incorporation of sp
· Describe portfolio revisions and rebalancing and evaluate the tradeoffs between alpha, risk, transaction costs and time
· 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.
· Describe dispersion, explain its causes and describe methods for controlling forms of dispersion.
· Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marg
undiversified portfolio VaR, and diversified portfolio VaR.
· Explain the role of correlation on portfolio risk.
· Describe the challenges associated with VaR measurement as portfolio size increases.
· 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

· Define risk budgeting.
· Describe the impact of horizon, turnover and leverage on the risk management process in the investment management
· Describe the investment process of large investors such as pension funds.
· Describe the risk management challenges associated with investments in hedge funds.
· Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, fundin
· Apply VaR to check compliance, monitor risk budgets and reverse engineer sources of risk.
· Explain how VaR can be used in the investment process and the development of investment guidelines.
· Describe the risk budgeting process across asset classes and active managers.
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium A
· Define, compare and contrast VaR and tracking error as risk measures.
· 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 risk monitoring and its role in an internal control environment.
· Identify sources of risk consciousness within an organization.
· 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.
· Explain the importance of liquidity considerations for a portfolio.
· Describe the objectives of performance measurement.
· 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 Sharpe’s measure, Treynor’s measure,
alpha), and information ratio.
· Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios, and the graphical rep
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 mo
· Describe style analysis.

· Describe and apply performance attribution procedures, including the asset allocation decision, sector and security sele
Andrew Ang, Asset Management: A Systematic Approach to Factor Investing (New York: Oxford University
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 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
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 inhere
· 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
· 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 growing concentratio
Kevin R. Mirabile, Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manag
Performance (Hoboken, NJ: Wiley Finance, 2013)
· 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 fund’s risk management process.
· Explain how due diligence can be performed on a fund’s operational environment.
· Explain how a fund’s business model risk and its fraud risk can be assessed.
· Describe elements that can be included as part of a due diligence questionnaire.

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
O’Hara, M. (2014). High-frequency trading and its impact on markets. Financial Analysts Journal, 70, 3. pp. 1
· 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? Retri
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 firm’s 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 2
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 Techno
Retrieved from 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 provid
associated 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 se
Hull, J. (2014) “The Changing Landscape for Derivatives”, by John Hull, Joseph L. Rotman School of Manag
Toronto. Retrieved from http://www-2.rotman.utoronto.ca/~hull/DownloadablePublications/Derivs_Changing
· 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 r
· 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
56.
· 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 simulati
• Identify advantages and disadvantages of non-parametric estimation methods.


• 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.
• Summarize how to map a fixed income portfolio into positions of standard instruments.
• Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time vary
• 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 fra
• 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.
• 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 model’s
· Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaus

• Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating portfolios.
• 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.
• Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple period
• Define option-adjusted spread (OAS) and apply it to security pricing.
• 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 incom
• 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 wi
· Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed
· Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with

· Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a m
volatility.

• 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.
• 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
· Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volati
· Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its sh
Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook (Hoboken, NJ: John Wiley & Son
· 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, expos
loss, and time horizon.
Compare bank failure and bank insolvency.


· Describe the Merton model for corporate security pricing, including its assumptions, strengths and weaknesses:
o Illustrate and interpret security-holder payoffs based on the Merton model
o Using the Merton Model, calculate the value of a firm’s equity and the default probability of a firm’s debt.
o 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, paramet
neighbor approach, and support vector machines.
· Differentiate between the following decision rules: minimum error, minimum risk, Neyman-Pearson and Minimax.
· Identify the problems and tradeoffs between classification and prediction models of performance.
· Describe important factors in the choice of a particular class of model.
· Using the Merton model, calculate the value of a firm’s 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, equ
· Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, CreditR
KMV model.
· Describe the credit risks associated with different types of securities.
· Differentiate between book and market values in a firm’s 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, a
· 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 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 firm’s debt and equity, and defau
· Explain the drawbacks of and assess possible improvements to the Merton Model.
· Describe credit factor models and evaluate an example of a single-factor model.
Define and calculate Credit VaR


· Define and calculate default correlation for credit portfolios.

· Identify the key participants in the securitization process, and describe conflicts of interest that can arise in the process
· 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 Fin
Edition (West Sussex, UK: John Wiley & Sons, 2012).
· Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given
rate.

· Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantage
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
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 mu
· 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 ma
· 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, potenti
· Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the de
exposure.
· Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on expo
· Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period, thresho
amount.

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


Michael Crouhy, Dan Galai and Robert Mark, The Essentials of Risk Management, 2nd Edition (New York: M
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 rat
· Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (C
(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 Markets—and 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
function.
· Describe the originate-to-distribute model of credit risk transfer and discuss the two ways of managing a bank credit portf
· Describe the different types and structures of credit derivatives including credit default swap (CDS), first-to-default put, t
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
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 (N
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 (SP
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 m
· Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR
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 Secu
· 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,” Fede
· Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of each factor
problems.
· Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower and
· Evaluate the role of the Board of Directors and senior management in implementing an effective operational risk struct
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
• Describe the Basel committee's suggestions for managing technology risk and outsourcing risk.
• Describe and outline business resiliency and continuity plans for banks under the Basel Committee framework.
• Identify and discuss the role of a bank’s public disclosures.
(2006): 8–20.*
· Define enterprise risk management (ERM).
· Explain how implementing ERM practices and policies can create shareholder value both at the macro and the micro le
· Describe the development and implementation of an ERM system.
· Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firm’s market ris
risk distributions.
· Distinguish between regulatory and economic capital, and explain the use of economic capital in the corporate decision
· Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits to a fir
developed RAF.
· Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors in the d
· Explain the benefits to a firm from having a robust risk data infrastructure, and describe key elements of an effective IT
firm.
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,
and reporting expected operational losses.
• Explain the use of a Risk Control Self Assessment (RCSA) and key risk indicators (KRI’s) in identifying, controlling and ass
exposures.
• Describe and assess the use of scenario analysis in managing operational risk, and identify biases and challenges which
scenario analysis.
• Compare the typical operational risk profiles of firms in different financial sectors.
• Compare different organizational designs for a risk management framework.
· Explain ways in which data from different external sources may differ.
· Describe the Société Générale 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 calcul
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 distributi
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
distribution.
· Describe the AMA guidelines for the use of insurance in reducing a bank’s operational risk capital charge.
“Operational Risk—Supervisory Guidelines for the Advanced Measurement Approaches,” (Basel Committee
Publication, June 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) a
management system (ORMS), including the use test and experience.
· Describe key guidelines for the selection of a bank's Operational Risk Categories (ORCs).
· Describe commonly used distributions used to model the frequency and severity of a bank’s operational loss events.
· Explain key guidelines for modeling the distribution of individual ORCs, including the selection of thresholds, necessary
of 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
categories.
· Describe the four required data elements in an AMA model and the guidelines for combining data from each element in
charge.
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
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 usin
• Compute and interpret the RAROC for a project, loan, or loan portfolio, and use RAROC to compare business unit perfo
• Explain the impact of changing assumptions used in calculating economic capital, including choosing a time horizon, me
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 firm’s risk capital and allocating econom
business lines.
• Explain best practices in implementing a RAROC approach.
2009).*
o Risk aggregation
· Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designe
Governors of the Federal Reserve System, August 2013
· Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy proce
o Assessing the impact of capital adequacy, including RWA and balance sheet projections
· Explain common motivations for entering into repos, including their use in cash management and liquidity managemen
· Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2008 credit c
· Describe the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an a

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

Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors to
· Identify challenges related to mapping of risk factors to positions in making VaR calculations.
· Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such
been avoided.
· Identify two major defects in model assumptions which led to the underestimation of systematic risk for residential mo

· Differentiate between sources of liquidity risk, including balance sheet/ funding liquidity risk, systemic risk funding liqui
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 trans
· 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 sit
· Describe transactions used in the collateral market and explain risks that can arise through collateral market transaction
· Describe the relationship between leverage and a firm's return profile and calculate the leverage effect.
· Explain the impact on a firm’s leverage and its balance sheet of the following transactions: purchasing long equity positi
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
liquidated over a number of trading days.
· Explain interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic
· Describe the major lines of business in which dealer banks operate and the risk factors they face in each line of busines
· Compare a liquidity crisis at a dealer bank to a traditional bank run.

· Compare and contrast the features and scope of stress tests before and after the Supervisory Capital Assessment Progr
· 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 st
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 re
regulations over time.
· Explain the calucation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
risk:
· Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR
· Describe and contrast the major elements of the three options available for the calculation of operational risk: basic ind
standardized approach, and the Advanced Measurement Approach.
· Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and marke

· Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II
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 ca
• Explain the process of calculating the incremental risk capital charge for positions held in a bank's trading book.
• Describe the comprehensive risk measure (CRM) for positions which are sensitive to correlations between defaul
• 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 introduc
• Describe and calculate ratios intended to improve the management of liquidity risk, including the required elverag
coverage ratio and the net stable funding ratio.
• Describe the mechanics of contingent convertible bonds (CoCos) and explain the motivations for banks to issue t
• 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 calcula
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
Version,” (Basel Committee on Banking Supervision Publication, June 2006).*
Note: GARP no longer provides learning objectives for the regulatory readings
Publication, January 2013).*
"Basel III: the net stable funding ratio." (Basel Committee on Banking Supervision Publication,
October 2014).
· Assess the impact of practical issues in portfolio construction such as determination of risk aversion, incorporation of sp
· Describe portfolio revisions and rebalancing and evaluate the tradeoffs between alpha, risk, transaction costs and time
· 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, marg
· 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

· Describe the impact of horizon, turnover and leverage on the risk management process in the investment management
· Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, fundin
· 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 Sharpe’s measure, Treynor’s measure,
· Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios, and the graphical rep
measures.
· Describe techniques to measure the market timing ability of fund managers with a regression and with a call option mo
to market timing.
· Describe and apply performance attribution procedures, including the asset allocation decision, sector and security sele
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
industry.
· Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inhere
· Describe market events which resulted in a convergence of risk factors for different hedge fund strategies, and explain
· Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentratio
Performance (Hoboken, NJ: Wiley Finance, 2013)

Glasserman, Paul. (2012). Forging Best Practices in Risk Management (Note: Only Section 2: FirmLevel Issu
Measurement). Office of Financial Research Working Paper #0002.
· Identifythe areas of risk management that have been most affeced byt the recent financial crisis and describe the majo
brought on by the 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 cre
· Distinguish between Commercial Paper and Asset-Backed Commercial Paper and describe the policy responses to recen
· 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 l
09 U.S. financial crisis”. Federal Reserve Board. February 2015
· Compare the advantages and disadvantages of liquidity regulations and a lender of last resort in managing liquidity and
financial crisis and identify 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
· Explain how a combination of liquidity regulations and lender of last resort can lead to an optimal policy mix to manage
financial downturns.
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 ma
• Describe current global trends and factors which have impacted liquidity in financial markets and explain their liquidity impa
• Summarize trends over the past 10 years in the volume and liquidity of the following financial markets: interest rates and int
sovereign bonds, repos, corporate bonds, CDS, securitized products, foreign exchange, equities, and emerging market financia
Duffie, Darrell and Stein, C. Jeremy. (2015). Reforming LIBOR and Other Financial Market
Benchmarks. Journal of Economic Perspectives—Volume 29, Number 2. Spring 2015. pp 191–212
• Discuss the recommended principles to make benchmark rates such as LIBOR and other interbank offered rates less suscepti
• 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 contr
• 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 (CCP’s) 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 memb
other CCP’s.
• 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 th
• Explain measures which can be adopted to mitigate systemic risks related to interconnections and interdependence of CCP’s
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
class of institutions to 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 institution
Fed-projected results.
Cybersecurity 101: A Resource Guide for Bank Executives”. Conference of State Banking
Supervisors. December 2014
• Identify the five core functions of the NIST’s 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
44.1
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
55.1
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
78
79
80
81
82
83
84
85
86
87
88

• Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical simulation
Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition. (New York: McGraw Hill,

“Messages from the Academic Literature on Risk Measurement for the Trading Book,” Basel Committee on Banking S
No. 19, Jan 2011.
• Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varyin
and VaR backtesting.
•. Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management fram

· Evaluate the limitations of financial modeling with respect to the model itself, calibration of the model, and the model’s outpu
Chapter 4 ……………….Financial Correlation Modeling – Bottom-Up Approaches (Sections 4.3.0 (intro), 4.3.1, and 4.3.2
· Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gauss

• Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple periods.
•Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed income

· Construct and describe the effectiveness of a short term interest rate tree assuming normally distributed rates, both with
· Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed r
· Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with m

· Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a mo
volatility.

• 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.
• 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 a
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 shap
Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook, 2nd Edition (Hoboken, NJ: John Wiley & S
· 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, exposur
time horizon.
· Compare bank failure and bank insolvency.

Giacomo De Laurentis, Renato Maino, and Luca Molteni, Developing, Validating and Using Internal Ratings (West Suss
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.
· 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 probabilit
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 Me
· Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample of firms by
· 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 m
· Describe the application of heuristic approaches, numeric approaches, and artificial neural network in modeling default risk an
weaknesses.
· Describe the role and management of qualitative information in assessing probability of default.
· Using the Merton model, calculate the value of a firm’s 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, a
· Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, CreditRisk+,
model.
· Calculate the conditional default probability given the hazard rate.

· Define and calculate default correlation for credit portfolios.

· Identify the key participants in the securitization process, and describe conflicts of interest that can arise in the process.
· 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 Mark
Sussex, UK: John Wiley & Sons, 2012).
· Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default

· Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, an
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 cred
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 n
· 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 futu
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 determi
· 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, threshold, an

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


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
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)
· 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
· Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (CAP) and the a
· Describe the customer relationship cycle and discuss the trade-off between creditworthiness and profitability.
· Discuss the benefits of risk-based pricing of financial services.

· 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 sw
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 &

· 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 disting
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 applicab
· 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 Associa
· 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 subpr
· Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower and the features
loan.
· Explain guidelines for strong governance of operational risk, and evaluate the role of the board of directors and senior manag
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 oper
• Explain the Basel committee's suggestions for managing technology risk and outsourcing risk.
Brian Nocco and René Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of Applied Corporate Finan
· Define enterprise risk management (ERM) and explain how implementing ERM practices and policies can create shareholder
the micro level.
· Describe the development and implementation of an ERM system, as well as challenges to the implementation of an ERM sy
· Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firm’s market risk, cred
distributions.
· Distinguish between regulatory and economic capital, and explain the use of economic capital in the corporate decision makin
“Observations on Developments in Risk Appetite Frameworks and IT Infrastructure,” Senior Supervisors Group, Dece
· Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the benefits to a firm of
· Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of Directors in the dev
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 m

Anthony Tarantino and Deborah Cernauskas, Risk Management in Finance: Six Sigma and Other Next Generation Techniques (Hobo
2009)
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.
• Summarize the process of collecting and reporting internal operational loss data, including the selection of thresholds, the tim
reporting expected operational losses.
• Explain the use of a Risk Control Self Assessment (RCSA) and key risk indicators (KRI’s) in identifying, controlling and asses
exposures.
• Describe and assess the use of scenario analysis in managing operational risk, and identify biases and challenges which can
analysis.
• Explain the role of operational risk governance and explain how a firm’s organizational structure can impact risk governance.
Philippa X. Girling, Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework (Ho
2013).
· Explain ways in which data from different external sources may differ.
· Describe the Société Générale 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 t
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 a
probability distributions.
· Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9 th percentile of an op
“Basel Committee on Banking Supervision Consultative Document, Standardised Measurement Approach for Operatio
• Explain the elements of the proposed Standardized Measurement Approach (SMA), including the business indicator, internal
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 Approache
rationale for the proposal to replace them.
• Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and treatment o
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: J
Chapter 5 ................................Validating Rating Models

• Explain the process of model validation and describe best practices for the roles of internal organizational units in the validatio
• 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 model’s data quality.
• Explain how to validate the calibration and the discriminatory power of a rating model.
• Explain the impact of model risk and poor risk governance in the 2012 London Whale trading loss and the 1998 collapse of L
Management.
• Define, compare and contrast risk capital, economic capital and regulatory capital, and explain the motivations for using econ
• Compute and interpret the RAROC for a project, loan, or loan portfolio, and use RAROC to compare business unit performan
• Explain challenges that arise when using RAROC for performance measurement, including choosing a time horizon, measuri
choosing a confidence level.
• Explain challenges in modeling diversification benefits, including aggregating a firm’s risk capital and allocating economic cap
• 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 Publica
o Risk aggregation
· Describe the BIS recommendations that supervisors should consider to make effective use of risk measures not designed for
“Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice,” Boar
Reserve System, August 2013
· Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy process f
(BHC’s) subject to the Capital Plan Rule.
o Assessing the impact of capital adequacy, including RWA and balance sheet projections
Bruce Tuckman, Angel Serrat, Fixed Income Securities: Tools for Today’s Markets, 3rd Edition (New York: Wiley, 2011
· Explain common motivations for entering into repos, including their use in cash management and liquidity management.
· 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 aucti

· Describe endogenous price approaches to LVaR, their motivation and limitations and calculate the elasticity-based liquidity a
· Describe liquidity at risk (LaR) and compare it to VaR, describe the factors that affect future cash flows, and explain challeng
LaR.
· Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors to
· Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such model
avoided.
· Explain major defects in model assumptions which led to the underestimation of systematic risk for residential mortgage back
the 2008-2009 financial downturn

· Differentiate between sources of liquidity risk, including balance sheet/ funding liquidity risk, systemic risk funding 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 transformati
· Describe specific liquidity challenges faced by money market mutual funds and by hedge funds, particularly in stress situation
· 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 eff
· Explain the impact on a firm’s leverage and its balance sheet of the following transactions: purchasing long equity positions o
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 Va
over a number of trading days.
· Explain interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.
· Describe the major lines of business in which dealer banks operate and the risk factors they face in each line of business.
“Stress Testing Banks,” Til Schuermann, prepared for the Committee on Capital Market Regulation, Wharton Financial
2012).
· Compare and contrast the features and scope of stress tests before and after the Supervisory Capital Assessment P
· 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 Europea
“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 effecti
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.
· Explain the motivations for introducing the Basel regulations, including key risk exposures addressed and explain the reasons
· Explain the calucation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
· Describe and contrast the major elements—including a description of the risks covered—of the two options available for the c

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

· Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II fram
• Describe and calulate the stressed value-at-risk measure introduced in Basel 2.5, and calculate the market risk capital charg
• Describe the comprehensive risk measure (CRM) for positions which are sensitive to correlations between default risks.
• Describe the motivations for and calculate the capital conservation buffer and the counterycyclical buffer introduced in Basel
• Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage ratio, the
net stable funding ratio.
• Describe the mechanics of contingent convertible bonds (CoCos) and explain the motivations for banks to issue them.

• 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 calcula
• Explain proposed modifications to Basel regulations in the following areas:
“Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework— Compreh
“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems—Revised Version,” (Basel C
“Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools,” (Basel Committee on Banking Supervisi
2013).*
“Revisions to the Basel II Market Risk Framework—Updated as of 31 December 2010,” (Basel Committee on Banking S
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, 201
Chapter 6……………Factor 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 CA
· Explain implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk, its
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 7……………Factors
· 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
· 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 exa
· Compare value and momentum investment strategies, including their risk and return profiles.
Chapter 10……………Alpha
· 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 Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate the inform
· Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those factors and
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 13……………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
Richard Grinold and Ronald Kahn, Active Portfolio Management: A Quantitative Approach for Producing Superior Retu
· Assess the impact of practical issues in portfolio construction such as determination of risk aversion, incorporation of specific
coverage.
· Describe portfolio revisions and rebalancing and evaluate the tradeoffs between alpha, risk, transaction costs and time horizo
· Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear progra
programming.
· Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marginal V
· 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 portfo
· Describe the impact of horizon, turnover and leverage on the risk management process in the investment management indus
· Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk
Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Approach (H
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 Sharpe’s measure, Treynor’s measure, Jens
· Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios, and the graphical represen
· Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model an
market timing.
· Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection
contribution.
· Explain the evolution of the hedge fund industry and describe landmark events which precipitated major changes in the devel

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

Böhme, Rainer; Christin, Nicolas; Edelman, Benjamin; and Tyler Moor, “Bitcoin: Economics, Technology, and Governa
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 Liquidity—An Overview”, Remarks at the Federal Reserve Bank of Atlanta 201
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, O
· 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 phone—electronic trading in fixed in
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 Qu
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 Polic
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.
2018 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
44.1
44.2
44.3
45.1
45.2
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45.4
45.5
45.6
45.7
45.8
46
47.1
47.2
48
49
50
51
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53
54
55.1
55.2
56
57
58
59.1
59.2
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64.1
64.2
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68.1
68.2
68.3
69
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70.4
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72.1
72.2
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No. 19, Jan 2011.
• 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.

• Evaluate the limitations of financial modeling with respect to the model itself, calibration of the model, and the model’s output.
• Assess the Pearson correlation approach, Spearman’s rank correlation, and Kendall’s τ, and evaluate their limitations and us
• 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 c
• Explain the drawback 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 level and change regressions.
• Describe principal component analysis and explain how it is applied to constructing a hedging portfolio.


• Construct and describe the effectiveness of a short-term interest rate tree assuming normally distributed rates, both with and
• Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed rates
• Describe methods for addressing the possibility of negative short-term rates interm structure models.
• Construct a short-term rate tree under the Ho-Lee Model with time-dependent drift
• Describe uses and benefits of the arbitrage-freemodels 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
• Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and half-life.

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

• Describe the short-term rate process under the Cox-Ingersoll-Ross(CIR) and lognormal models.
Hull, Options, Futures, and Other Derivatives, 10th Edition (New York: Pearson, 2017)
• Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to
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.
• Explain the impact of a single asset price jump on a volatility smile.
• 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
time horizon
• Compare bank failure and bank insolvency.

• Assess the quality of various sources of information used by a credit analyst.
• Describe the role of ratings incredit risk management.
• Describeclassifications ofcredit risk and theircorrelation with other financial risks.
• Define defaultrisk, 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.
• Definerisk-adjusted pricingand determinerisk-adjusted return onrisk-adjusted capital (RARORAC).

• 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 probabili
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 M
• Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample of firms by
• Describe the application of a logistic regression model to estimate default probability.
• Define and interpret cluster analysis and principal component analysis.
• Describe the use of a cash flow simulation model in assigning rating and default probability, and explain the limitations of the
• Describe the application of heuristic approaches, numeric approaches, and artificial neural networks in modeling default risk a
weaknesses.
• Describe the role and management of qualitative information in assessing probability of default.
• Using the Merton model, calculate the value of a firm’s debt and equity and the volatility of firm value.
• Explain the relationship between credit spreads, time to maturity, and interest rates, and calculate credit spread.
• Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equity, an
• Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, CreditRisk+, C
model.
• Define the hazard rate and use it to define probability functions for default time and conditional default probabilities.
• Calculate the conditional default probability given the hazard rate.

• Define and calculate default correlation for credit portfolios.
• Assess the impact ofcorrelation on a credit portfolio and its Credit VaR.
• Describe the use ofa 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.

• Identify the key participants in the securitization process, and describe conflicts of interest that can arise in the process.
• Compute and evaluate one or two iterations of interim cashflows in a three-tiered securitization structure.
Jon Gregory, The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital, 3rd edition (West Sussex
2015).
Chapter 4 ................................Counterparty Risk
• Describe counterparty risk and differentiate it from lending risk.
• Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default,
• Identify and describe the different ways institutions can quantify, manage and mitigate counterparty risk.
Chapter 5 ................................Netting, Close-out and Related Aspects

• 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 and explain their advantages and disadvantages.
• Identify and describe termination events and discuss their potential effects on parties to a transaction.
• Describe the rationale for collateral management.
• Describe the terms of a collateral and features of a credit support annex (CSA) within the ISDA Master Agreement
including threshold, initial margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support
• Describe the mechanics of collateral and the types of collateral that are typically used.
• Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to cred
• Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.
Chapter 7………………………………………...Credit Exposure and Funding

• Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential futur
• Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determin
• 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, threshold, an
Chapter 9. ...............................Counterparty Risk Intermediation

• Identify counterparty risk intermediaries including central counterparties (CCPs), derivative product companies (DPC
vehicles (SPVs), and monoline insurance companies ( monolines) and describe their roles.
• Describe the risk management process of a CCP and explain the loss waterfall structure of a CCP.
• Compare bilateral and centrally cleared over-the-counter (OTC) derivative markets.
• Assess the capital requirements for a qualifying CCP and discuss the advantages and disadvantages of CCPs.
• Discuss the impact of central clearing on credit value adjustment (CVA), funding value adjustment (FVA), capital valu
margin value adjustment (MVA).
Chapter 12...............................Default Probabilities, Credit Spreads, Funding Costs

• 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 d
• Compare the various approaches for estimating price: historical data approach, equity based approach, and risk neutral appr
Chapter 14...............................Credit and Debt Value Adjustment

• Evaluate the impact of changes in the credit spread and recovery rate assumptions on CVA.
• Define andcalculate incremental CVA and marginal CVA, and explain how to convert CVA into a running spread.
• Describe debt value adjustment (DVA) and bilateral CVA (BCVA).
• Calculate BCVAand BCVAspread.
Chapter 17...............................Wrong-Way Risk

• Discuss the impact of wrong-way risk on collateral and the impact of WWR on central counterparties.
Stress Testing: Approaches, Methods, and Applications, Edited by Akhtar Siddique and Iftekhar Hasan (London: Risk
• 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
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,
• 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
• Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (CAP
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.

• 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 chan
• 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 swaps (CDS), first-to-default puts, tota
backed credit-linked notes (CLN), and their applications.
• Explain the credit risk securitization process and describe the structure of typical collateralized loan obligations (CLOs) or coll
(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: J

• Define securitization, describe the securitization process, and explain the role of participant in the process.
• 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)
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 they are most applicab
• Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR), t
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 Securit
• Explain the decline in demand for new-issue securitized finance products following the 2007 financial crisis.
Adam Ashcraft and Til Schuermann, “Understanding the Securitization of Subprime Mortgage Credit,” Federal Reserve
• Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of each factor to t
problems.
• Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower and the f
subprime loan.
• Explain the implications of credit ratings on the emergence of subprime related mortgage backedsecurities.
• Summarize the fundamental principles of operational risk management as suggested by the Basel Committee.
• Explain guidelines for strong governance of operational risk, and evaluate the role of the board of directors and senior manag
• Describe tools and processes that 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 opera
• Explain the Basel Committee’ssuggestions for managing technology risk and outsourcing risk.
• Define enterprise risk management (ERM) and explain how implementing ERM practices and policies can create shareholder
the micro level.
• Explain how a company can determine its optimal amount of risk through the use of credit rating targets.
• Describe the development and implementation of an ERM system, as well as challenges to the implementation of an ERM sy
• Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firm’s market risk, cred
distributions.
• Distinguish between regulatory and economic capital, and explain the use of economic capital in the corporate decision makin
• Describe the concept of a risk appetite framework (RAF), identify the elements of an RAF, and explain the benefits to a firm o
RAF.
• Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO), and its board of directors in the
• Explain the role of an RAF in managing the risk of individual business lines within a firm, and describe best practices
for monitoring a firm’s risk profile for adherence to the RAF.
• Explain the benefits to a firm fromhaving a robustrisk data infrastructure,and describe key elements of an effective IT risk man
• Describe factors that can lead to poor or fragmented IT infrastructure at an organization.
Anthony Tarantino and Deborah Cernauskas, Risk Management in Finance: Six Sigma and Other Next Generation Tech
Wiley & Sons, 2009)
• Explain how a firm can set expectations for its data quality and describe some key dimensions of data quality used in this pro
exposures.
analysis.
2013).
• Explain the motivations for usingexternal operational loss data and common sources ofexternal data.
• Explain ways in which data fromdifferent external sources may differ.
• Describechallenges that can arise through the use ofexternal data.
• Describe the Société Générale operational losseventand explain the lessons learned from the event.

• Compare the basic indicator approach, the standardized approach, and the alternative standardized approach for calculating
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 a
• Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9th percentile of an op
• Explain the use of scenario analysis and the hybrid approach in modeling operational risk capital.
“Basel Committee on Banking Supervision Consultative Document, Standardised Measurement Approach for Operatio
• Explain the elements of the proposed Standardized Measurement Approach (SMA), including the business indicator,
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 A
explain the rationale for the proposal to replace them.
• Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and tre
data.

• Explain the process of model validation and describe best practices for the roles of internal organizational units in the validati
Management.

• Define, compare and contrast risk capital, economic capital and regulatory capital, and explain the motivations for using econ
allocate risk capital.
• Describe the RAROC (risk-adjusted return on capital) methodology and its use in capital budgeting.
o Defining and calculating risk measures
o Risk aggregation
· Describe the BIS recommendations that supervisors should consider to make effective use of internal risk measures, such a
designed for regulatory purposes.
• Explain benefits and impacts of using an economic capital framework within the following areas:
• Describe best practices and assess key concerns for the governance of an economic capital framework.
Federal Reserve System, August 2013
• Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy process f
(BHCs) subject to the Capital Plan Rule.
• Describe practices that can result in a strong and effective capital adequacy process for a BHC in the following areas:
o Assessing the impact of capital adequacy, including risk- weighted asset RWA and balance sheet projections
• 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 (2007-2009) credit cris
• 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 aucti
• Calculate the financing advantage ofa 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, and calculate the elasticity based liquidity a
• Describe liquidity atrisk (LaR) and compare it to LVaR and VaR, describe the factors that affect future cash flows, and explain
modeling LaR.
• Describe approaches to estimate liquidity risk during crisis situations and challenges which can arise during this pr
• Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors to
• Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such model
avoided.
• Explain major defects inmodel assumptions that led to the underestimation of systematic risk for residential mortgage backed
2007- 2009 financial downturn.

• Differentiate between sources of liquidity risk, including balance sheet/funding liquidity risk, systematic funding liquidity risk, a
• Summarize the asset-liability management process ata fractional reserve bank, including the process of liquidity transformati
• Describe specific liquidity challenges faced by money market mutual funds and by hedge funds, particularly in stress situation
• 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 e
• Explain the impact on a firm’sleverage and its balance sheet of the following transactions: purchasing long equity positions on
• Explain methods to measure and manage funding liquidity risk and transactions liquidity risk
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity adjustment t
• Explain interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.
• 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
Til Schuermann, “Stress Testing Banks,” prepared for the Committee on Capital Market Regulation, Wharton Financial
2012).
• Describe the historical evolution of the stress testing process and compare methodologies of historical EBA, CCAR
• Explain challenges in designing stress test scenarios, including the problem of coherence in modeling risk factors.
• Explain challenges in modeling a bank’s revenues, losses, and its balance sheet over a stress test horizon period.
• Explain how risks can arise through outsourcing activities to third-party service providers, and describe elements of an effecti
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.
• Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and explain the reason
• Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
• Describe and contrast the major elements—including a description of the risks covered—of the two options available for the

• Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR.
• Describeand contrast the major elements of the three options available for the calculation of operational risk:

o Standardized Approach
• Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and market disc

• Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II fram
• Compare the standardized approach and the internal models approach for calculating the SCR in Solvency II.
• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer introduced in Basel I
the net stable funding ratio.

• Describe the proposed changes to the Basel market risk capital calculation and the motivations for these changes, a
capital under this method.
• Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank can calculat
• Explain proposed modifications to Basel regulations in the following areas:
“Sound management of risks related to money laundering and financing of terrorism,” (Basel Committee on Banking S
• Explain best practices recommended by the Basel committee for the assessment, management, mitigation and monitoring of
financial terrorism (ML/FT) risks.
• Describe recommended practices for the acceptance, verification and identification of customers at a bank.
• Explain practices for managing ML/FT risks in a group-wide and cross-border context, and describe the roles and responsibil
managing these risks.
• Explain policies and procedures a bank should use to manage ML/FT risks in situations where it uses a third party to perform
when engaging in correspondent banking.

“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems—Revised Version,” Basel C
2013).*
February 2011).*
"Basel III: the net stable funding ratio." (Basel Committee on Banking Supervision Publication, October 2014).
• 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 CA
• Explain implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk, its
• 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.
• 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
• 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 Fama-French model as an ex
• Compare value and momentum investment strategies, including their risk and return profiles.
Chapter 10……………Alpha (and the Low-Risk Anomaly)

• 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 Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate the inform
• Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those factors and
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.

• 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.
• Describe the unsmoothing of returns and its properties.
• Compare illiquidity risk premiums across and within asset categories.
• Evaluate portfolio choice decisions on the inclusion of illiquid assets.
• 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
alpha coverage.
• Describe portfolio revisions and rebalancing, and evaluate the tradeoffs between alpha, risk, transaction costs, and time horiz
• 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 progra
programming.
• Describe dispersion, explain its causes, and describe methods for controlling forms of dispersion.
Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition (2007)
• Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, margina
• 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 portfo
• Describe the impact of horizon, turnover, and leverage on the risk management process in the investment management indus
• Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk
• Apply VaR to check compliance, monitor risk budgets, and reverse engineer sources of risk.
• Describe the risk budgeting process and calculate risk budgets across asset classes and active managers.
Sons, 2003).
• Define,compare,and contrast VaR and tracking error as risk measures.
• Describe risk planning, including its objectives, effects, and the participants in its development.
• 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 Sharpe’s measure, Treynor’s measure, Jens
• Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios, and the graphical represen
• Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model, an
market timing.
• Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection
contribution.
• Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds.
• Explain biases that are commonly found in databases of hedge funds.
• Explain the evolution of the hedge fund industry and describe landmark events that precipitated major changes in the develo

• Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risk
• Describe market events that resulted in a convergence of risk factors for different hedge fund strategies, and explain the impa
• Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of
Edition (Hoboken, NJ: Wiley Finance, 2016)

Cohen, Benjamin H. and Gerald A. Edwards, Jr., “The new era of expected credit loss provisioning,” BIS Quarterly Rev
• Describe the reasons to provision for expected credit losses.

• Compare and contrast the key aspects of the IASB (IFRS 9) and FASB (CECL) standards.
• Assess the progress banks have made in the implementation of the standards.
• Examine the impact on the financial system posed by the standards.
Varian, Hal, “Big Data: New Tricks for Econometrics,” Journal of Economic Perspectives 28:2 (Spring 2014), 3 -28.
• Describe the issues unique to big data sets.

• Explain and assess different tools and techniques for manipulating and analyzing big data.
• Examine the areas for collaboration between econometrics and machine learning.
van Liebergen, Bart, “Machine Learning: A Revolution in Risk Management and Compliance?” Institute of Internationa
• Describe the process of machine learning and compare machine learning approaches.
• Describe the application of machine learning approaches within the financial services sector and the types of problems to wh
• Analyze the application of machine learning in three use cases:

• Credit risk and revenue modeling
• Fraud
• Surveillance of conduct and market abuse in trading
Cont, Rama, “Central clearing and risk transformation,” Norges Bank Research, March 2017.
• Examine how the clearing of over-the-counter transactions through central counterparties has affected risks in the financial sy
• Assess whether central clearing has enhanced financial stability and reduced systemic risk.
• Describe the transformation of counterparty risk into liquidity risk.
• Explain how liquidity of clearing members and liquidity resources of CCPs affect risk management and financial stability.
• Compare and assess methods a CCP can use to help recover capital when a member defaults or when a liquidity crisis occu
Song Shin, Hyun, “The bank/capital markets nexus goes global,” BIS Quarterly Review, November 2016.
• Describe the links between banks and capital markets.

• Explain the effects of forced deleveraging and the failure of covered interest rate parity.
• Discuss the US dollar’s role as the measure of the appetite for leverage.
• Describe the implications of a stronger US dollar on financial stability and the real economy.
“FinTech credit: Market structure, business models and financial stability implications.” BIS—Committee on Global Fi
• Describe how FinTech credit markets are likely to develop and how they will affect the nature of credit provision and the tradit
• Analyze the functioning of FinTech credit markets and activities, and assess the potential microfinancial benefits and risks of
• Examine the implications for financial stability in the event that FinTech credit grows to account for a significant share of over
Lo, Andrew W., “The Gordon Gekko Effect: The Role of Culture in the Financial Industry,” Federal Reserve Bank of New
Review, 22:1 (August 2016).
• Explain how different factors can influence the culture of a corporation in both positive and negative ways.
• Examine the role of culture in the context of financial risk management.
• Describe the framework for analyzing culture in the context of financial practices and institutions.
• Analyze the importance of culture and a framework that can be used to change or improve a corporate culture
2019 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
44.1
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
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54
55.1
55.2
56
57
58.1
58.2
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60
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63.1
63.2
64
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66
67.1
67.2
67.3
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71.4
72
73.1
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84


No. 19, Jan 2011.

• Evaluate the limitations of financial modeling with respect to the model itself, calibration of the model, and the model’s output.
• Assess the Pearson correlation approach, Spearman’s rank correlation, and Kendall’s τ, and evaluate their limitations and us




underlying asset.
horizon

• 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.
• Define risk-adjusted pricing and determine risk-adjusted return on risk-adjusted capital (RARORAC).

default rate.
weaknesses.
model.
• Calculate the unconditional default probability and the conditional default probability given the hazard rate.

• Assess the effect of granularity on Credit VaR.

2015).
• Describe credit value adjustment (CVA) and compare the use of CVA and credit limits in evaluating and mitigating co
• Identify and explain the costs of an OTC derivative.
• Explain the components of the xVA term.

• Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and
• Describe the terms of a collateral and features of a credit support annex (CSA) within the ISDA Master Agreement including t
minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.
• Explain aspects of collateral including funding, rehypothecation and segregation.

• Assess the impact of collateral on counterparty risk and funding, with and without segregation or rehypothecation.

• Identify counterparty risk intermediaries including central counterparties (CCPs), derivative product companies (DPCs), speci
monoline insurance companies ( monolines) and describe their roles.
• Discuss the impact of central clearing on credit value adjustment (CVA), funding value adjustment (FVA), capital value adjust
adjustment (MVA).

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

• Calculate BCVA and BCVA spread.

• Discuss the impact of collateral on wrong-way risk
• Discuss the impact of wrong-way risk on central counterparties.
techniques.

• Explain the credit risk securitization process and describe the structure of typical collateralized loan obligations (CLOs) or coll
(CDOs).

problems.
• Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrower and the f
subprime loan.
• Explain the Basel Committee’s suggestions for managing technology risk and outsourcing risk.
the micro level.
distributions.
• Describe the concept of a risk appetite framework (RAF), identify the elements of an RAF, and explain the benefits to a firm o
• Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO), and its board of directors in the
• Explain the role of an RAF in managing the risk of individual business lines within a firm, and describe best practices for mon
adherence to the RAF.
• Explain the benefits to a firm from having a robustrisk data infrastructure,and describe key elements of an effective IT risk ma
Wiley & Sons, 2009)
exposures.
analysis.
2013).
• Explain the motivations for using external operational loss data and common sources of external data.
• Explain ways in which data from different external sources may differ.
• Describe challenges that can arise through the use of external data.
• Describe the Société Générale 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
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 a
• Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9th percentile of an op


• Define, compare and contrast risk capital, economic capital and regulatory capital, and explain methods and motivations for
approaches to allocate risk capital.
o Risk aggregation
• Describe the BIS recommendations that supervisors should consider to make effective use of internal risk measures, such as
• Explain common motivations for entering into repos, including their use in cash management and liquidity management.
• Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the (2007-2009) credit cris
• Describe the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an aucti

• Describe endogenous price approaches to LVaR, their motivation and limitations, and calculate the elasticity based liquidity a
• Describe liquidity atrisk (LaR) and compare it to LVaR and VaR, describe the factors that affect future cash flows, and explain
modeling LaR.
• Describe approaches to estimate liquidity risk during crisis situations and challenges which can arise during this process.
avoided.
• Explain major defects inmodel assumptions that led to the underestimation of systematic risk for residential mortgage backed

• Differentiate between sources of liquidity risk, including balance sheet/funding liquidity risk, systematic funding liquidity risk, a
• Summarize the asset-liability management process ata fractional reserve bank, including the process of liquidity transformati
• Describe specific liquidity challenges faced by money market mutual funds and by hedge funds, particularly in stress situation
• Describe the relationship between leverage and a firm’s return profile, calculate the leverage ratio, and explain the leverage e
• Explain the impact on a firm’s leverage and its balance sheet of the following transactions: purchasing long equity positions o
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity adjustment t
• Explain interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.
• 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
2012).
• Describe the historical evolution of the stress testing process and compare methodologies of historical EBA, CCAR and SCA
outsourcing risk.
• Summarize the impact of netting on credit exposure and calculate the net replacement ratio.
• Describe and contrast the major elements—including a description of the risks covered—of the two options available for the

• Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR.

• Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and market disc
• Apply and calculate the worst-case defaultrate (WCDR) in the context of Basel II.
• Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II fram
• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer introduced in Basel I
• Describe regulations for global systemically important banks (G-SIBs), including incremental capital requirements a
capacity (TLAC).
• Explain the major changes to the U.S. financial market regulations as a result of Dodd-Frank and compare Dodd-Frank reg
other countries.
Chapter 17. Regulation of the OTC Derivatives Market

• Summarize the clearing process in OTC derivative markets.
• Describe changes to the regulation of OTC derivatives which took place after the 2007-2009 financial crisis and expla
changes

• Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of th
the motivations for these changes.
• Explain the FRTB revisions to Basel regulations inthe following areas
• Backtesting, profit and loss attribution, credit risk, and securitizations
“High-level summary of Basel III reforms,” (Basel Committee on Banking Supervision Publication, December 2017)
• Explain the motivations for revising the Basel III framework and the goals and impacts of the December 2017 reforms
• Summarize the December 2017 revisions to the Basel III framework in the following areas:
• The standardized approach to credit risk
• The internal ratings-based (IRB) approaches for credit risk
• The CVA risk framework
• The operational risk framework
• The leverage ratio framework
• Describe the revised output floor introduced as part of the Basel III reforms and approaches to be used when calc
“Basel III: Finalising post-crisis reforms,” (Basel Committee on Banking Supervision Publication, December 2017): 128
• Explain the elements of the new standardized approach to measure operational risk capital, including the business i
multiplier, and loss component, and calculate the operational risk capital requirement for a bank using this approach.
• Compare the SMA to earlier methods of calculating operational risk capital, including the Advanced Measurement Ap
• Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and tre
data.
“Sound management of risks related to money laundering and financing of terrorism,” (Basel Committee on Banking S
• Explain best practices recommended by the Basel committee for the assessment, management, mitigation and monitoring of
terrorism (ML/FT) risks.
• Explain practices for managing ML/FT risks in a group-wide and cross-border context, and describe the roles and responsibil
these risks.
• Explain policies and procedures a bank should use to manage ML/FT risks in situations where it uses a third party to perform
when engaging in correspondent banking.

2013).*
February 2011).*
“Basel III: Finalising post-crisis reforms,” (Basel Committee on Banking Supervision Publication, December 2017).
• Assess methods of mitigating volatility risk in a portfolio,and describe challenges that arise when managing volatility risk.

• Explain the impact of benchmark choice on alpha,and describe characteristics of an effective benchmark to measure alpha.
benchmark.

Edition (New York: McGraw-Hill, 2000).
coverage.
programming.
Sons, 2003).
and information ratio.
timing.
contribution.


Kopp, Emanuel and Kaffenberger, Lincoln and Wilson, Christopher, “Cyber Risk, Market Failures, and Financial Stabili
Working Paper No. 17/185.
• Evaluate the private market’sability to provide the socially optimal level of cybersecurity.
• Describe how systemic cyber risk interacts with financial stability risk.
• Evaluate the appropriateness of current regulatory frameworks and supervisory approaches to the reduction of systemic risk.
• Evaluate measures that can help increase resiliency to cyber risk.


• Fraud
“Artificial intelligence and machine learning in financial services,” Financial Stability Board, Nov. 1, 2017.
• Describe the drivers that have contributed to the growing use of FinTech and the supply and demand factors that have spurre
learning in financial services.
• Describe the use of AI and machine learning in the following cases: (i) customer -focused uses; (ii) operations focused uses;
management in financial markets; (iv) uses for regulatory compliance.
• Describe the possible effects and potential benefits and risks of AI and machine learning on financial markets and how they m
Gomber, Peter and Kauffman, Robert J. and Parker, Chris and Weber, Bruce, “On the Fintech Revolution: Interpreting
Disruption and Transformation in Financial Services,” (December 20, 2017). Journal of Management
Information Systems, 35(1), 2018, 220-265.
• Describe how fintech is changing operations management in financial services.

• Explain how fintech innovations have impacted lending and deposit services.
• Describe how fintech innovations have begun to leverage the execution and stakeholder value associated with payments set
blockchain technologies, and cross-border payment services.
• Examine the issues with respect to investments, financial markets, trading, risk management, robo-advisory, and related serv
blockchain and fintech innovations.
• Examine how the clearing of over-the-counter transactions through central counterparties has affected risks in the financial sy
• Explain how liquidity of clearing members and liquidity resources of CCPs affect risk management and financial stability.
• Compare and assess methods a CCP can use to help recover capital when a member defaults or when a liquidity crisis occu
“What is SOFR?” CME Group, March 2018.
• Explain the Secured Overnight Financing Rate (SOFR) and its underlying transaction pool.
• Compare the underlying interest rate exposures for SOFR futures and other short-term interest rate futures.
2019 Reading #
35.1
35.2
56
36.1
36.2
37
38.1
38.2
38.3
38.4
39.1
39.2
39.3
39.4
39.5
40.2
67.4
41.1
41.2
31
42.1
42.2
43
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
3 (in 2015)
52
53
54
55.1
55.2
57
58.1
58.2
59
60
62
63.1
65
66
67.1
67.2
67.3
68
69
70
63.2
64
61
71.4
71.1
71.2
71.3
72
73.1
73.2
74
75
76
77
78
79
80
81
82
83
84

• Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical

risk factors, and VaR backtesting.
•. Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet mana

• Evaluate the limitations of financial modeling with respect to the model itself, calibration of the model, and the mod
• Assess the Pearson correlation approach, Spearman’s rank correlation, and Kendall’s τ, and evaluate their limitat
• Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the
• Calculate the face value of multiple offsetting swap positions needed to carry out a two-variable regression hedge

•Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on f
• Evaluate the appropriateness of the Black-Scholes-Merton model when valuing derivatives on fixed income securit
• Construct and describe the effectiveness of a short-term interest rate tree assuming normally distributed rates, bo
• Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and ha

• Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change usin
volatility.
• Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset
• Describe the volatility smile for equity options and foreign currency options and provide possible explanations for i
Hull, Risk Management and Financial Institutions, 5th Edition (Hoboken, NJ: John Wiley & Sons, 2018)
• Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of
the motivations for these changes.
• Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank c
shortfall using the various horizons.
Jonathan Golin and Philippe Delhaise, The Bank Credit Analysis Handbook, 2nd Edition (Hoboken, NJ: Joh

• Describe quantitative measurements and factors of credit risk, including probability of default, loss given default, e
loss, and time horizon

Gerhard Schroeck, Risk Management and Value Creation in Financial Institutions, (New York: Wiley, 2002)
Chapter 5, pp. 170-186 only ….Capital Structure in Banks
• Evaluate a bank’s economic capital relative to its level of credit risk
• Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exp
• Define and calculate expected loss (EL).

• Define and calculate unexpected loss (UL).
• Estimate the variance of default probability assuming a binomial distribution. (This LO has been moved to T6)
• Calculate UL for a portfolio and the UL contribution of each asset. (This LO has been moved to T6)
• Describe how economic capital is derived.
• Explain how the credit loss distribution is modeled.(This LO has been moved to T6)
• Describe challenges to quantifying credit risk
Giacomo De Laurentis, Renato Maino, and Luca Molteni, Developing, Validating and Using Internal Ratings (
Kingdom: John Wiley & Sons, 2010).
• 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
• Define risk-adjusted pricing and determine risk-adjusted return on risk-adjusted capital (RARORAC).

• 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, margin
annualized default rate.
• Apply the Merton model to calculate default probability and the distance to default and describe the limitations of u
• Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample
• Describe the use of a cash flow simulation model in assigning rating and default probability, and explain the limitat
• Describe the application of heuristic approaches, numeric approaches, and artificial neural networks in modeling d
strengths and weaknesses.
default.
• Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, Cr
the KMV model.



• Identify the key participants in the securitization process, and describe conflicts of interest that can arise in the pro
Jon Gregory, The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital, 3rd edition (We
Sons, 2015).
• Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss gi
rate.
• Describe credit value adjustment (CVA) and compare the use of CVA and credit limits in evaluating and mitigating

• Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadva
fit into the framework of the ISDA master agreement.
• Describe the mechanics of termination provisions and trade compressions and explain their advantages and disad
• Describe the terms of a collateral and features of a credit support annex (CSA) within the ISDA Master Agreemen
margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.

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 t
exposure.
• Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period, th
amount.

• Identify counterparty risk intermediaries including central counterparties (CCPs), derivative product companies (DP
(SPVs), and monoline insurance companies ( monolines) and describe their roles.
• Discuss the impact of central clearing on credit value adjustment (CVA), funding value adjustment (FVA), capital v
margin value adjustment (MVA).

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


Stress Testing: Approaches, Methods, and Applications, Edited by Akhtar Siddique and Iftekhar Hasan (Lon
• Explain the treatment of counterparty credit risk (CCR) both as a credit risk and as a market risk and describe its i
and risk management for a financial institution.
• Calculate the stressed expected loss, the stress loss for the loan portfolio and the stress loss on a derivative portf
• Calculate the debt value adjustment (DVA) and explain how stressing DVA enters into aggregating stress tests of

• Discuss the key variables in a mortgage credit assessment and describe the use of cutoff scores, default rates, an
model.
• Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy p
ratio (AR) techniques.

• Identify and explain the different techniques used to mitigate credit risk, and describe how some of these techniqu
credit function.
• Describe the originate-to-distribute model of credit risk transfer and discuss the two ways of managing a bank cred
• Describe the different types and structures of credit derivatives including credit default swaps (CDS), first-to-defau
(TRS), asset-backed credit-linked notes (CLN), and their applications.
• Explain the credit risk securitization process and describe the structure of typical collateralized loan obligations (C
obligations (CDOs).
Sons, 2010)
• Explain the terms over-collateralization, first-loss piece, equity piece, and cash waterfall within the securitization pr
• Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose ve
between the three main SPV structures: amortizing, revolving, and master trust.
• Explain the various performance analysis tools for securitized structures and identify the asset classes they are m
• Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio
average coupon(WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for relevant sec
• Explain the prepayment forecasting methodologies and calculate the constant prepayment rate (CPR) and the Pu
(PSA) rate.
mortgage problems.
• Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical borrow
• Explain guidelines for strong governance of operational risk, and evaluate the role of the board of directors and se
implementing an effective operational risk framework.
(2006): 8–20.*
• Define enterprise risk management (ERM) and explain how implementing ERM practices and policies can create s
macro and the micro level.
• Describe the development and implementation of an ERM system, as well as challenges to the implementation of
• Describe the role of and issues with correlation in risk aggregation, and describe typical properties of a firm’s mark
operational risk distributions.
• Distinguish between regulatory and economic capital, and explain the use of economic capital in the corporate dec
James Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition (Hoboken, NJ: John Wil
Chapter 4…………………….What is ERM?
• Describe enterprise risk management (ERM) and compare and contrast differing definitions of ERM.
• Compare the benefits and costs of ERM and describe the motivations for a firm to adopt an ERM initiative.
• Describe the role and responsibilities of a chief risk officer (CRO) and assess how the CRO should interact with ot
• Distinguish between components of an ERM program.
“Implementing Robust Risk Appetite Frameworks to Strengthen Financial Institutions”, Institute of Internat
Executive Summary – Section 4, pp. 10 – 40
· Relate the use of risk appetite frameworks (RAF) to the management of risk in a firm.
· Define risk culture and assess the relationship between a firm’s risk appetite and its risk culture.
· Describe and evaluate key challenges to the implementation of RAFs.
· Describe current best practices for the implementation and communication of RAFs.
· Explain the relationship between the RAF and the strategic and capital planning processes.
· Assess the role of stress testing within an RAF as well as challenges in firm-wide risk aggregation
• Describe the concept of a risk appetite framework (RAF), identify the elements of an RAF, and explain the benefits
developed RAF.
• Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO), and its board of direc
• Explain the role of an RAF in managing the risk of individual business lines within a firm, and describe best practic
profile for adherence to the RAF.
• Explain the benefits to a firm from having a robustrisk data infrastructure,and describe key elements of an effective
a firm.
Anthony Tarantino and Deborah Cernauskas, Risk Management in Finance: Six Sigma and Other Next Gene
NJ: John Wiley & Sons, 2009)
• Explain how a firm can set expectations for its data quality and describe some key dimensions of data quality used
• 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 thresho
recoveries, and reporting expected operational losses.
• Explain the use of a Risk Control Self Assessment (RCSA) and key risk indicators (KRI’s) in identifying, controllin
risk exposures.
• Describe and assess the use of scenario analysis in managing operational risk, and identify biases and challenge
scenario analysis.
• Explain the role of operational risk governance and explain how a firm’s organizational structure can impact risk g
• Explain the motivations for using external operational loss data and common sources of external data.
• Explain ways in which data from different external sources may differ.
• Describe challenges that can arise through the use of external data.
• Describe the Société Générale 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
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 dist
guidelines for probability distributions.
• Explain how Monte Carlo simulation can be used to generate additional data points to estimate the 99.9th percent
distribution.
Giacomo De Laurentis, Renato Maino, Luca Molteni, Developing, Validating and Using Internal Ratings (Hob
Sons, 2010).
• Explain the process of model validation and describe best practices for the roles of internal organizational units in
• Compare qualitative and quantitative processes to validate internal ratings, and describe elements of each process
• Explain the impact of model risk and poor risk governance in the 2012 London Whale trading loss and the 1998 co
Management.

• Define, compare and contrast risk capital, economic capital and regulatory capital, and explain methods and motiv
capital approaches to allocate risk capital.
• Compute and interpret the RAROC for a project, loan, or loan portfolio, and use RAROC to compare business unit
• Explain challenges that arise when using RAROC for performance measurement, including choosing a time horizo
probability, and choosing a confidence level.
• Explain challenges in modeling diversification benefits, including aggregating a firm’s risk capital and allocating ec
business lines.
o Risk aggregation
• Describe the BIS recommendations that supervisors should consider to make effective use of internal risk measur
that are not designed for regulatory purposes.
the Federal Reserve System, August 2013
• Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequac
companies (BHCs) subject to the Capital Plan Rule.
• Describe practices that can result in a strong and effective capital adequacy process for a BHC in the following are
o Assessing the impact of capital adequacy, including risk- weighted asset RWA and balance sheet projecti

• Describe endogenous price approaches to LVaR, their motivation and limitations, and calculate the elasticity base
• Describe liquidity atrisk (LaR) and compare it to LVaR and VaR, describe the factors that affect future cash flows,
estimating and modeling LaR.
• Describe approaches to estimate liquidity risk during crisis situations and challenges which can arise during this pr
• Explain how model risk and variability can arise through the implementation of VaR models and the mapping of ris
have been avoided.
• Explain major defects inmodel assumptions that led to the underestimation of systematic risk for residential mortga
during the 2007- 2009 financial downturn.
Til Schuermann, “Stress Testing Banks,” prepared for the Committee on Capital Market Regulation, Wharton
Center (April 2012).
“Guidance on Managing Outsourcing Risk,” Board of Governors of the Federal Reserve System, December
• Explain how risks can arise through outsourcing activities to third-party service providers, and describe elements o
manage outsourcing risk.
• Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and explain
Basel regulations over time.
• Summarize the impact of netting on credit exposure and calculate the net replacement ratio.
• Describe and contrast the major elements—including a description of the risks covered—of the two options availa
market risk:

• Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesti
• Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and m
• Apply and calculate the worst-case defaultrate (WCDR) in the context of Basel II.
• Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solve
describe the repercussions to an insurance company for breaching the SCR and MCR.
• Describe the comprehensive risk measure (CRM) for positions which are sensitive to correlations between defaul

• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer introduce
• Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverag
ratio and the net stable funding ratio.
• Describe regulations for global systemically important banks (G-SIBs), including incremental capital requirements
capacity (TLAC).
• Explain the major changes to the U.S. financial market regulations as a result of Dodd-Frank and compare Dodd-F
in other countries.
John C. Hull, Risk Management and Financial Institutions, 5th Edition (Hoboken, NJ: John Wiley & Sons, 201
• Describe changes to the regulation of OTC derivatives which took place after the 2007-2009 financial crisis and ex
changes
“High-level summary of Basel III reforms,” (Basel Committee on Banking Supervision Publication, Decembe
• Explain the motivations for revising the Basel III framework and the goals and impacts of the December 2017 refo
• Describe the revised output floor introduced as part of the Basel III reforms and approaches to be used when c
• Explain the elements of the new standardized approach to measure operational risk capital, including the business
multiplier, and loss component, and calculate the operational risk capital requirement for a bank using this approach
• Compare the SMA to earlier methods of calculating operational risk capital, including the Advanced Measurement
• Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and
data.
“Sound management of risks related to money laundering and financing of terrorism,” (Basel Committee on
2017).
• Explain best practices recommended by the Basel committee for the assessment, management, mitigation and mo
and financial terrorism (ML/FT) risks.
• Explain practices for managing ML/FT risks in a group-wide and cross-border context, and describe the roles and
in managing these risks.
• Explain policies and procedures a bank should use to manage ML/FT risks in situations where it uses a third party
diligence and when engaging in correspondent banking.
Readings for Regulatory Reference (OPTIONAL READINGS)
(Basel Committee on Banking Supervision Publication, June 2006).*
January 2013).*
"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, Oct
“Basel III: Finalising post-crisis reforms,” (Basel Committee on Banking Supervision Publication, December
• Differentiate between sources of liquidity risk, including balance sheet/funding liquidity risk, systematic funding liqu
liquidity risk, and explain how each of these risks can arise for financial institutions.
• Summarize the asset-liability management process ata fractional reserve bank, including the process of liquidity t
• Describe specific liquidity challenges faced by money market mutual funds and by hedge funds, particularly in stre
• Compare transactions used in the collateral market and explain risks that can arise through collateral market trans
• Describe the relationship between leverage and a firm’s return profile, calculate the leverage ratio, and explain the
• Explain the impact on a firm’s leverage and its balance sheet of the following transactions: purchasing long equity
into short sales, and trading in derivatives.
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity 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 syste
• Describe the major lines of business in which dealer banks operate and the risk factors they face in each line of bu
• Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these r
• Explain common motivations for entering into repos, including their use in cash management and liquidity manage
• Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the (2007-2009
• Describe the characteristics of special spreads and explain the typical behavior of US Treasury special spreads ov
• Describe the capital asset pricing model (CAPM) including its assumptions, and explain how factor risk is address
• Explain implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to fa
diversification benefits, and shortcomings of the CAPM.
• Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility affect risk pre
• Assess methods of mitigating volatility risk in a portfolio,and describe challenges that arise when managing volatili
• Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the Fama-French mod

• Explain the impact of benchmark choice on alpha,and describe characteristics of an effective benchmark to measu
• Describe Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate
this law.
• Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those
against that benchmark.
• Assess the impact of practical issues in portfolio construction, such as determination of risk aversion, incorporation
• Describe portfolio revisions and rebalancing, and evaluate the tradeoffs between alpha, risk, transaction costs, an
• Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, li
quadratic programming.
• Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental Va
VaR, undiversified portfolio VaR, and diversified portfolio VaR.
• Describe the impact of horizon, turnover, and leverage on the risk management process in the investment manage
• Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, f
• 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 Sharpe’s measure, Treynor’s me
(Jensen’s alpha), and information ratio.
measures.
due to market timing.
• Describe and apply performance attribution procedures, including the asset allocation decision, sector and securi
• Explain the evolution of the hedge fund industry and describe landmark events that precipitated major changes in
industry.
• Describe market events that resulted in a convergence of risk factors for different hedge fund strategies, and expla
Performance 2nd Edition (Hoboken, NJ: Wiley Finance, 2016)

Kopp, Emanuel and Kaffenberger, Lincoln and Wilson, Christopher, “Cyber Risk, Market Failures, and Finan
2017). IMF Working Paper No. 17/185.
• Evaluate the private market’sability to provide the socially optimal level of cybersecurity.
• Describe how systemic cyber risk interacts with financial stability risk.
• Evaluate the appropriateness of current regulatory frameworks and supervisory approaches to the reduction of sy
• Evaluate measures that can help increase resiliency to cyber risk.
Varian, Hal, “Big Data: New Tricks for Econometrics,” Journal of Economic Perspectives 28:2 (Spring 2014),
van Liebergen, Bart, “Machine Learning: A Revolution in Risk Management and Compliance?” Institute of In
2017.
• Describe the application of machine learning approaches within the financial services sector and the types of prob
applied.
• Fraud
• Describe the drivers that have contributed to the growing use of FinTech and the supply and demand factors that
and machine learning in financial services.
• Describe the use of AI and machine learning in the following cases: (i) customer -focused uses; (ii) operations focu
portfolio management in financial markets; (iv) uses for regulatory compliance.
• Describe the possible effects and potential benefits and risks of AI and machine learning on financial markets and
stability.
Gomber, Peter and Kauffman, Robert J. and Parker, Chris and Weber, Bruce, “On the Fintech Revolution: In
Innovation, Disruption and Transformation in Financial Services,” (December 20, 2017). Journal of Managem
Information Systems, 35(1), 2018, 220-265.
• Describe how fintech is changing operations management in financial services.
• Explain how fintech innovations have impacted lending and deposit services.
• Describe how fintech innovations have begun to leverage the execution and stakeholder value associated with pa
cryptocurrencies, blockchain technologies, and cross-border payment services.
• Examine the issues with respect to investments, financial markets, trading, risk management, robo-advisory, and r
influenced by blockchain and fintech innovations.
• Examine how the clearing of over-the-counter transactions through central counterparties has affected risks in the
• Explain how liquidity of clearing members and liquidity resources of CCPs affect risk management and financial st
• Compare and assess methods a CCP can use to help recover capital when a member defaults or when a liquidity
“What is SOFR?” CME Group, March 2018.
• Explain the Secured Overnight Financing Rate (SOFR) and its underlying transaction pool.
• Compare the underlying interest rate exposures for SOFR futures and other short-term interest rate futures.
2020 Reading
Topic 5
MR–1 (R1.1)
MR–2 (R1.2)
MR–3 (R1.3)
MR–4 (R2.1)
MR–5 (R2.2)
MR–6 (R3)
MR–7 (R4.1)
MR–8 (R4.2)
MR–9 (R4.3)
MR–10 (R5.1)
MR–11 (R5.2)
MR–12 (R5.3)
MR–13 (R5.4)
MR–14 (R5.5)
MR–15 (R6)
MR–16 (R7)
Topic 6
CR–1 (R8.1)
CR–2 (R8.2)
CR–3 (R9)
CR–4 (R10)
CR–5 (R11)
CR–6 (R12.1)
CR–7 (R12.2)
CR–8 (R12.3)
CR–9 (R13.1)
CR–10 (R13.2)
CR–11 (R13.3)
CR–12 (R13.4)
CR–13 (R13.5)
CR–14 (R13.6)
CR–15 (R13.7)
CR–16 (R14)
CR–17 (R15.1)
CR–18 (R15.2)
CR–19 (R16)
CR–20 (R17)
Topic 7
ORR-1 (R18)
ORR-2 (R19)
ORR-3 (R20)
ORR-4 (R21)
ORR-5 (R22)
ORR-6 (R23)
ORR-9 (R26)
ORR-7 (R24)
ORR-8 (R25)
ORR-10 (R27)
ORR-12 (R29)
ORR-13 (R30)
ORR-14 (R31)
ORR-11 (R28)
ORR-15 (R32)
ORR-16 (R33)
ORR-17 (R34)
ORR-19 (R36)
ORR-20 (R37)
ORR-18 (R35)
ORR-21 (R38)
ORR-22 (R39)
ORR-23 (R40)
ORR-24 (R41)
ORR-25 (R42)
ORR-26 (R43)
(NEW) Topic 8
LTR-1 (R44)
LTR-2 (R45)
LTR-3 (R46)
LTR-4 (R47.1)
LTR-5 (R47.2)
LTR-6 (R48)
LTR-7 (R49)
LTR-8 (R50)
LTR-9 (R51)
LTR-10 (R52)
LTR-11 (R53)
LTR-12 (R54.1)
LTR-13 (R54.2)
LTR-14 (R55)
LTR-15 (R56)
LTR-16 (R57)
LTR-17 (R58)
LTR-18 (R59)
LTR-19 (R60)
Topic 9
IM-1 (R61.1)
IM-2 (R61.2)
IM-3 (R61.3)
IM-4 (R62)
IM-5 (R63.1)
IM-6 (R63.2)
IM-7 (R64)
IM-8 (R65)
IM-9 (R66)
IM-10 (R67)
Topic 10
[CI-1] (R68)
[CI-6] (R73)
[CI-7] (R74)
[CI-8] (R75)
[CI-2] (R69)
[CI-3] (R70)
[CI-4] (R71)
[CI-5] (R72)
[CI-9] (R76)
[CI-10] (R77)

• Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered histo


No. 19, Jan 2011.
Gunter Meissner, Correlation Risk Modeling and Management, 2nd Edition (Risk Books, 2019).
Chapter 1. ………………. Correlation Basics: Definitions, Applications, and Terminology
Chapter 5 ……………….Financial Correlation Modeling – Bottom-Up Approaches (pages 126-134 only)



volatility.
underlying asset.
motivations for these changes.

time horizon

• Explain the CAMEL system used for evaluating the financial condition of a bank.
Gerhard Schroeck, Risk Management & Value Creation in Financial Institutions (New York, NY: John Wiley &
Chapter 5. Capital Structure in Banks (pp. 170-186 only)

• Estimate the variance of default probability assuming a binomial distribution.
• Calculate UL for a portfolio and the UL contribution of each asset.
• Explain how the credit loss distribution is modeled.

• Describe the experts-based approaches, statistical-based models, and numerical approaches to predicting de
• Describe a rating migration matrix and calculate the probability of default, cumulative probability of default, ma
annualized default rate.
• Apply the Merton model to calculate default probability and the distance to default and describe the limitations
• Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sam
• Describe the use of a cash flow simulation model in assigning rating and default probability, and explain the lim
• Describe the application of heuristic approaches, numeric approaches, and artificial neural networks in modelin
and weaknesses.
model.


2015).

the framework of the ISDA master agreement.


and monoline insurance companies ( monolines) and describe their roles.
value adjustment (MVA).



techniques.

function.

coupon(WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for relevant securitized s
problems.
OPERATIONAL AND INTEGRATED RISK MANAGEMENT—Part II Exam Weight 20% |
and the micro level.
distributions.
• Describe best practices for the implementation and communication of a risk appetite framework (RAF) at a firm
• Explain the relationship between a firm’s RAF and its risk culture, and between the RAF and a firm’s strategy a
• Explain key challenges to the implementation of an RAF and describe ways that a firm can overcome each
• Assess the role of stress testing within an RAF, and describe challenges in aggregating firm-wide risk exposur
• Explain lessons learned in the implementation of a RAF through the presented case studies.
“Banking Conduct and Culture: A Permanent Mindset Change,” G30 Working Group, 2018. (Introduction thr
• Describe challenges faced by banks with respect to conduct and culture, and explain motivations for b
culture.
• Explain methods by which a bank can improve its corporate culture, and assess progress made by ba
• Explain how a bank can structure performance incentives and make staff development decisions to en
• Summarize expectations by different national regulators for banks’ conduct and culture.
• Describe best practices and lessons learned in managing a bank’s corporate culture.
Alessandro Carretta and Paola Schwizer, Risk Culture in Banking (Palgrave Macmillan, 2017).
Chapter 2: Risk Culture
• Compare risk culture and corporate culture and explain how they interact.
• Explain factors that influence a firm’s corporate culture and its risk culture.
• Describe methods by which corporate culture and risk culture can be measured.
• Describe characteristics of a strong risk culture and challenges to the implementation of an effective r
• Assess the relationship between risk culture and business performance.
John Wiley & Sons, 2009)
exposures.
analysis.
“Supervisory Guidance on Model Risk Management,” Federal Deposit Insurance Corporation, June 7, 2017.
• Describe model risk and explain how model risk can arise in the implementation of a model.
• Describe elements of an effective process to manage model risk.
• Explain best practices for the development and implementation of a model.
• Describe elements of a strong model validation process and challenges to an effective validation proc

• Define, compare and contrast risk capital, economic capital and regulatory capital, and explain methods and mot
lines.
o Risk aggregation
not designed for regulatory purposes.
Federal Reserve System, August 2013
avoided.
the 2007- 2009 financial downturn.
2012).
outsourcing risk.
Mark Carey “Management of Risks Associated with Money Laundering and Financing of Terrorism,” GARP R
• Explain best practices recommended for the assessment, management, mitigation and monitoring of m
Mark Carey, “Capital Regulation Before the Global Financial Crisis,” GARP Risk Institute, April 2019.
• Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and exp
• Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of c
calculate market risk capital for assets in the trading book.
• Describe changes to the Basel regulations made as part of Basel II, including the three pillars.
• Compare the standardized IRB approach, the Foundation Internal Ratings-Based (IRB) approach, and the adv
of credit risk capital under Basel II.
• Compare the basic indicator approach, the standardized approach, and the Advanced Measurement Approach
capital under Basel II.
• Summarize elements of the Solvency II capital framework for insurance companies.
Mark Carey, “Solvency, Liquidity and Other Regulation After the Global Financial Crisis,” GARP Risk Institu
• Describe the comprehensive risk (CR) capital charge for portfolios of positions that are sensitive to correlat

• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, includin
systemically important banks (G-SIBs).
the net stable funding ratio.
• Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory r
2007 – 2009 financial crisis.
loss component, and calculate the operational risk capital requirement for a bank using this approach.
Andrew Coburn, Eireann Leverett, and Gordon Woo, Solving Cyber Risk: Protecting Your Company and Soc
Chapter 8: The Cyber-Resilient Organization

• Describe elements of an effective cyber-resilience framework and explain ways that an organization can becom
• Explain resilient security approaches that can be used to increase a firm’s cyber resilience, and describe challen
• Explain methods that can be used to assess the financial impact of a potential cyber attack and explain ways to
“Cyber-resilience: Range of practices,” (Basel Committee on Banking Supervision Publication, December 2

• Define cyber-resilience and compare recent regulatory initiatives in the area of cyber-resilience.
• Describe current practices by banks and supervisors in the governance of a cyber risk management framework
• Explain methods for supervising cyber-resilience, testing and incident response approaches, and cybersecurity
• Explain and assess current practices for the sharing of cybersecurity information between different types of inst
“Building the UK financial sector’s operational resilience,” (Bank of England, July 2018). (Exclude Section 3
• Describe operational resilience and describe threats and challenges to the operational resilience of a financial in
• Explain recommended principles, including tools and metrics, for maintaining strong operational resilience at fin
• Describe potential consequences of business disruptions, including potential systemic risk impacts.
• Define impact tolerance; explain best practices and potential benefits for establishing the impact tolerance for a
“Striving for Operational Resilience,” Oliver Wyman, 2019.

• Compare operational resilience to traditional business continuity and disaster recovery approaches.
• Describe elements of an effective operational resilience framework and its potential benefits.

2013).*
February 2011).*
Liquidity and Treasury Risk Measurement and Management – Part II Exam Weight 15% (LTR)
Chapter 24. Liquidity Risk
• Explain and calculate liquidity trading risk via cost of liquidation and liquidity-adjusted VaR (LVaR).
• Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti G
• Evaluate Basel III liquidity risk ratios and BIS principles for sound liquidity risk management.
• Explain liquidity black holes and identify the causes of positive feedback trading.
• Differentiate between sources of liquidity risk and describe specific challenges faced by different types of finan
risk.
• Summarize the asset-liability management process at a fractional reserve bank, including the process of liquid
• Compare transactions used in the collateral market and explain risks that can arise through collateral market t
• Describe the relationship between leverage and a firm’s return profile (including the leverage effect), and distin
transactions on a firm’s leverage and balance sheet.
• Distinguish methods to measure and manage funding liquidity risk and transactions liquidity risk.
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity
• Discuss interactions between different types of liquidity risk and explain how liquidity risk events can increase
Shyam Venkat, Stephen Baird, Liquidity Risk Management (Hoboken, NJ: John Wiley & Sons, 2016)
Chapter 6. Early Warning Indicators
• Evaluate the characteristics of sound Early Warning Indicators (EWI) measures.
• Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve).
• Discuss the applications of EWIs in the context of the liquidity risk management process.
Peter Rose, Sylvia Hudgins, Bank Management & Financial Services, Ninth Edition (New York, NY: McGraw-
Chapter 10. The Investment Function in Financial Services Management
• Compare various money market and capital market instruments and discuss their advantages and disadvanta
• Identify and discuss various factors that affect the choice of investment securities by a bank.
• Apply investment maturity strategies and maturity management tools based on the yield curve and duration.
Chapter 11. Liquidity and Reserves Management: Strategies and Policies

• Calculate a bank’s net liquidity position and explain factors that affect the supply and demand of liquidity at a b
• Compare strategies that a bank can use to meet demands for additional liquidity.
• Estimate a bank’s liquidity needs through three methods (sources and uses of funds, structure of funds, and liq
• Summarize the process taken by a US bank to calculate its legal reserves.
• Differentiate between factors that affect the choice among alternate sources of reserves.
Chapter 4. Intraday Liquidity Risk Management
• Identify and explain the uses and sources of intraday liquidity.
• Discuss the governance structure of intraday liquidity risk management.
• Differentiate between methods for tracking intraday flows and monitoring risk levels.
Antonio Castagna, Francesco Fede, Measuring and Managing Liquidity Risk (United Kindom, John Wiley & S
Chapter 6. Monitoring Liquidity
• Distinguish between deterministic and stochastic cash flows and provide examples of each.
• Describe and provide examples of liquidity options, and explain the impact of liquidity options on a bank’s liqui
management process.
• Define liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, cash flow at risk.
• Interpret the term structure of expected cash flows and cumulative cash flows.
• Discuss the impact of available asset transactions on cash flows and liquidity generation capacity.
Darrell Duffie, 2010. “The Failure Mechanics of Dealer Banks,” Journal of Economic Perspectives 24:1, 51-72
• Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face
• Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate the
• Assess policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.
Chapter 3. Liquidity Stress Testing
• Differentiate between various types of liquidity, including funding, operational, strategic, contingent, and restric
• Estimate contingent liquidity via the liquid asset buffer.
• Discuss liquidity stress test design issues such as scope, scenario development, assumptions, outputs, govern
models.
Moorad Choudhry, The Principles of Banking Institutions (Singapore: John Wiley & Sons, 2012)
Chapter 14. Liquidity Risk Reporting and Stress Testing
• Identify best practices for the reporting of a bank’s liquidity position.
• Compare and interpret different types of liquidity risk reports.
• Explain the process of reporting a liquidity stress test and interpret a liquidity stress test report.
Chapter 7. Contingency Funding Planning
• Discuss the relationship between contingency funding plan and liquidity stress testing.
• Evaluate the key design considerations of a sound contingency funding plan.
• Assess the key components of a contingency funding plan (governance and oversight, scenarios and liquidity ga
monitoring and escalation, data and reporting).
Chapter 12. Managing and Pricing Deposit Services
• Differentiate between the various transaction and non-transaction deposit types.
• Compare different methods used to determine the pricing of deposits and calculate the price of a deposit acco
conditional pricing formulas.
• Explain challenges faced by banks that offer deposit accounts, including deposit insurance, disclosures, overdraf
Chapter 13. Managing Nondeposit Liabilities

• Distinguish the various sources of non-deposit liabilities at a bank.
• Describe and calculate the available funds gap.
• Discuss factors affecting the choice of non-deposit funding sources.
• Calculate overall cost of funds using both the historical average cost approach and the pooled-funds approach.
• Describe the mechanics of repurchase agreements (repos) and calculate the settlement for a repo transaction
• Discuss common motivations for entering into repos, including their use in cash management and liquidity man
• Discuss 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 -
• Identify the characteristics of special spreads and explain the typical behavior of US Treasury special spreads
• Calculate the financing advantage of a bond trading special when used in a repo transaction.
Joel Grant, 2011. “Liquidity Transfer Pricing: A Guide to Better Practice,” Occasional Paper, Financial Stabi
• Discuss the process of liquidity transfer pricing (LTP) and identify best practices for the governance and imple
• Discuss challenges that may arise for banks during the implementation of LTP.
• Compare the various approaches to liquidity transfer pricing (zero cost, average cost, matched maturity margin
• Describe the contingent liquidity risk pricing process and calculate the cost of contingent liquidity risk.
Patrick McGuire, Gotz von Peter, 2009. “The US Dollar Shortage in Global Banking and the International Poli
Bank for International Settlements.
• Identify the causes of the US Dollar shortage during the Great Financial Crisis.
• Evaluate the importance of assessing maturity/currency mismatch across the balance sheets of consolidated e
• Discuss how central bank swap agreements overcame challenges commonly associated with international len
Claudio Borio, Robert McCauley, Patrick McGuire, Vladyslav Sushko, 2016. “Covered Interest Rate Parity Lo
Currency Basis,” BIS Quarterly Review.
• Differentiate between the mechanics of FX swaps and cross-currency swaps.
• Identify key factors that affect the cross-currency swap basis.
• Assess the causes of covered interest rate parity violations after the financial crisis of 2008.
Chapter 7. Risk management for Changing Interest Rates: Asset-Liability Management and Duration Techniq
• Discuss how asset-liability management strategies can help a bank hedge against interest rate risk.
• Describe interest-sensitive gap management and apply this strategy to maximize a bank’s net interest margin.
• Describe duration gap management and apply this strategy to protect a bank’s net worth.
• Discuss the limitations of interest-sensitive gap management and duration gap management.
• Explain the unsmoothing of returns and its properties.

benchmark.
alpha coverage.
programming.
& Sons, 2003).
• Describe Liquidity Duration Statistic and how it can be used to measure liquidity.
market timing.
contribution.

2nd Edition (Hoboken, NJ: Wiley Finance, 2016)

“The Impact of Blockchain Technology on Finance: A Catalyst for Change,” International Center for Moneta
(Section 1-Section 3 only)
• Describe the challenges blockchain technology faces in gaining widespread adoption in economic applications.
• Explain and assess the questions to be considered prior to implementing a blockchain solution to any economic ac
• Explain the concept of cost of trust when speaking about legacy financial systems and blockchain technology.
• Describe the current regulatory concerns surrounding crypto-finance and assess the steps taken by regulators to a

• Fraud
machine learning in financial services.
“FinTech and market structure in financial services: Market developments and potential financial stability im
Board, February 14, 2019.
• Differentiate between the potential changes to market structure (lending, payments, insurance, trading) and financ
innovation through traditional providers, Fintech providers, Big Tech and third-party tech servicers.
• Discuss the impact and risks of technological developments in the areas of APIs, mobile banking and cloud compu
scope of the EU’s Payment Services Directive.
• Analyze the market structure impact and risks of China’s NPI’s online MMFs in the areas of same day cash availa
and concentration risk along with the effort of Chinese authorities to address these risks.
Stijn Claessens, Jon Frost, Grant Turner, and Feng Zhu, “Fintech credit markets around the world: size, driv
Review, September 23, 2018.
• Describe the difficulties involved in measuring the size of the global Fintech credit market.
• Describe the factors that have driven the recent growth of the Fintech credit market.
• Examine the potential benefits and risks inherent in the Fintech credit market.
• Compare and evaluate how different jurisdictions have crafted policy and regulatory responses to the Fintech cred
“Sound Practices: Implications of fintech developments for banks and bank supervisors,” Bank for Internat
2018.
• Differentiate between the five Basel fintech scenarios and the roles participants (incumbent banks, new banks, Big
providers) perform and risks they are subject to in each.
• Discuss the Basel disintermediated bank scenario and its impact on incumbent banks’ present business models. I
funding risks.
• Distinguish practical instances of Basel Committee’s Principles for sound management of operational risk (PSMOR
• Distinguish the implications for bank supervisors on regulatory frameworks as a result of fintech along with existing
responses.
Tobias Adrian and Tommaso Mancini-Griffoli, “The Rise of Digital Money,” International Monetary Fund (IMF
• Describe the characteristics of e-money that could propel a rapid global adoption of this type of money.
• Describe the risks faced by the banking sector as e-money adoption increases.
• Evaluate regulatory and policy actions that could be implemented in response to risks arising from increased adop
Hugues Chenet, “Climate Change and Financial Risk,” Social Science Research Network, June 25, 2019.
• Discuss the history of climate change related risks for the financial sector including the Paris Agreement (2015) an
2.1 c as it pertains to the financial system.
• Distinguish the causes of potential mispricing of climate change risk and the impact of relevant history and data, n
kurtoses, skew, “black swan” events, and risk materialization time horizons on pricing as compared to traditional inve
• Discuss recent reporting and disclosure requirements under Article 173 of the French Energy Transition Act and th
Sustainable Finance Action Plan on the allocation of capital towards sustainable investments and inclusion of climat
institutions’ risk management policies.
Andreas Schrimpf and Vladyslav Sushko, “Beyond LIBOR: a primer on the new benchmark rates,” BIS Quar
• Describe the features comprising an ideal benchmark.
• Examine the issues that led to the replacement of LIBOR as the reference rate.
• Examine the risks inherent in basing risk-free rates (RFR’s) on transactions in the repo market.
Mapping Notes
This chapter was moved from T7 (op risk) to T5

New Edition
Changed from Chapter 4 to Chapter 5 in new edition

Moved from T7 (op risk) to T5
This chapter is used in T4 with new Los but there are no changes in the original Los for T6
This LO was moved to T6 from T4 Schroeck

Moved from Gregory Chapter 12
This Reading was moved to T7 but some Los are still used in T1
This LO maps to previous T1 James Lam reading


This reading was Reading 3 in Topic 1 in 2015, but removed from curriculum in 2016
Maps to 2015 LO
Maps to 2015 LOs

Maps to 2015 LO with wording added
Maps to 2015 LOs
New LO
Most Los map to Hull Chapter 15
Most Los map to Hull Chapter 16
Wording changed, but I think the content is the same
Wording added but this has been covered in previous LOs

All LOs map exactly to previous R68
All LOs map exactly to previous R69

Moved from T7 (op risk)
Wording changed, but LO content remains the same

Moved from T7 (op risk)

onal Settlements.
Moved from Risk Management and Investment Management

2020 Reading
Topic 5
MR–1 (R1.1)
MR–2 (R1.2)
MR–3 (R1.3)
MR–4 (R2.1)
MR–5 (R2.2)
MR–6 (R3)
MR–7 (R4.1)
MR–8 (R4.2)
MR–9 (R4.3)
MR–10 (R5.1)
MR–11 (R5.2)
MR–12 (R5.3)
MR–13 (R5.4)
MR–14 (R5.5)
MR–15 (R6)
MR–16 (R7)
Topic 6
CR–1 (R8.1)
CR–2 (R8.2)
CR–3 (R9)
CR–4 (R10)
CR–5 (R11)
CR–6 (R12.1)
CR–7 (R12.2)
CR–8 (R12.3)
CR–9 (R13.1)
CR–10 (R13.2)
CR–11 (R13.3)
CR–12 (R13.4)
CR–13 (R13.5)
CR–14 (R13.6)
CR–15 (R13.7)
CR–16 (R14)
CR–17 (R15.1)
CR–18 (R15.2)
CR–19 (R16)
CR–20 (R17)
Topic 7
ORR-1 (R18)
ORR-2 (R19)
ORR-3 (R20)
ORR-4 (R21)
ORR-5 (R22)
ORR-6 (R23)
ORR-7 (R24)
ORR-8 (R25)
ORR-9 (R26)
ORR-10 (R27)
ORR-11 (R28)
ORR-12 (R29)
ORR-13 (R30)
ORR-14 (R31)
ORR-15 (R32)
ORR-16 (R33)
ORR-17 (R34)
ORR-18 (R35)
ORR-19 (R36)
ORR-20 (R37)
ORR-21 (R38)
ORR-22 (R39)
ORR-23 (R40)
ORR-24 (R41)
ORR-25 (R42)
ORR-26 (R43)
(NEW) Topic 8
LTR-1 (R44)
LTR-2 (R45)
LTR-3 (R46)
LTR-4 (R47.1)
LTR-5 (R47.2)
LTR-6 (R48)
LTR-7 (R49)
LTR-8 (R50)
LTR-9 (R51)
LTR-10 (R52)
LTR-11 (R53)
LTR-12 (R54.1)
LTR-13 (R54.2)
LTR-14 (R55)
LTR-15 (R56)
LTR-16 (R57)
LTR-17 (R58)
LTR-18 (R59)
LTR-19 (R60)
Topic 9
IM-1 (R61.1)
IM-2 (R61.2)
IM-3 (R61.3)
IM-4 (R62)
IM-5 (R63.1)
IM-6 (R63.2)
IM-7 (R64)
IM-8 (R65)
IM-9 (R66)
IM-10 (R67)
Topic 10
[CI-10] (R77)
[CI-7] (R74)
[CI-8] (R75)
[CI-1] (R68)
[CI-6] (R73)
[CI-2] (R69)
[CI-3] (R70)
[CI-4] (R71)
[CI-5] (R72)
[CI-9] (R76)

approaches.



Supervision, Working Paper, No. 19, Jan 2011.
volatility in VaR risk factors, and VaR backtesting.
framework.


•Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fi
securities.

without drift.
no drift.
reversion.

time dependent volatility.
pricing of options on the underlying asset.

(FRTB), and the motivations for these changes.
expected shortfall using the various horizons.
2013).
default, expected loss, and time horizon

rate.
United Kingdom: John Wiley & Sons, 2010).
of default, and annualized default rate.
Merton model.
credit quality.
model.
and define their strengths and weaknesses.
risk of default.
CreditMetrics, and the KMV model.



the recovery rate.

describe how they fit into the framework of the ISDA master agreement.
threshold, initial margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.

quality.

exposure, expected positive exposure and negative exposure, effective exposure, and maximum exposure.
of credit exposure.
minimum transfer amount.

purpose vehicles (SPVs), and monoline insurance companies ( monolines) and describe their roles.
(KVA), and margin value adjustment (MVA).



Books, 2013)
trading activities and risk management for a financial institution.

credit scoring model.
the accuracy ratio (AR) techniques.

the bank credit function.
return swaps (TRS), asset-backed credit-linked notes (CLN), and their applications.
Wiley & Sons, 2010)
distinguish between the three main SPV structures: amortizing, revolving, and master trust.
weighted average coupon(WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for re
structures.
Association (PSA) rate.
Bank of New York Staff Reports, no. 318, (March 2008).*
subprime mortgage problems.
in implementing an effective operational risk framework.
risk.
No. 4 (2006): 8–20.*
value, both at the macro and the micro level.
risk, and operational risk distributions.
process.

management.
June 2011.
planning process.
• Explain key challenges to the implementation of an RAF and describe ways that a firm can overcome each ch
Learned only)
• Describe challenges faced by banks with respect to conduct and culture, and explain motivations for banks to
conduct and culture.
• Explain methods by which a bank can improve its corporate culture, and assess progress made by banks in th
• Explain how a bank can structure performance incentives and make staff development decisions to encourage
corporate culture.
• Describe characteristics of a strong risk culture and challenges to the implementation of an effective risk cultur
timeframe for recoveries, and reporting expected operational losses.
operational risk exposures.
when using scenario analysis.
• Describe elements of a strong model validation process and challenges to an effective validation process.
Techniques (Hoboken, NJ: John Wiley & Sons, 2009)
process

portfolio positions.
errors could have been avoided.
securities (RMBS) during the 2007- 2009 financial downturn.
economic capital approaches to allocate risk capital.
default probability, and choosing a confidence level.
different business lines.
March 2009).*
o Risk aggregation
economic capital, that are not designed for regulatory purposes.
bank holding companies (BHCs) subject to the Capital Plan Rule.
Institutions Center (April 2012).
stress tests.
program to manage outsourcing risk.
February 2019.
• Explain best practices recommended for the assessment, management, mitigation and monitoring of money la
financial terrorism (ML/FT) risks.
of these changes
for revisions to Basel regulations over time.
• Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit ex
methods to calculate market risk capital for assets in the trading book.
approach for the calculation of credit risk capital under Basel II.
calculation of operational risk capital under Basel II.
• Describe the comprehensive risk (CR) capital charge for portfolios of positions that are sensitive to correlations be
risks.
• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, including
globally systemically important banks (G-SIBs).
liquidity coverage ratio and the net stable funding ratio.
• Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory reforms tha
after the 2007 – 2009 financial crisis.
III framework.
floor.
internal loss multiplier, and loss component, and calculate the operational risk capital requirement for a bank using t
(AMA).
operational loss data.
NJ: Wiley, 2019).
resilient.
implementation.
• Explain methods that can be used to assess the financial impact of a potential cyber attack & explain ways to in
financial resilience.
responsibilities.
metrics.
Annex 1)
business process.


Comprehensive Version,” (Basel Committee on Banking Supervision Publication, June 2006).*
Publication, January 2013).*
Supervision Publication, February 2011).*
Metallgesellschaft.

managing liquidity risk.
transformation.
of different types of transactions on a firm’s leverage and balance sheet.
VaR for a position to be liquidated over a number of trading days.

its liquidity management process.
business.
integration with other risk models.
contingent actions, monitoring and escalation, data and reporting).
plus, marginal cost, and conditional pricing formulas.
basic (lifeline) banking.


crisis.
cycle.
LTP process.
BIS Working Papers, Bank for International Settlements.
Understanding the Cross-Currency Basis,” BIS Quarterly Review.


treatment of diversification benefits, and shortcomings of the CAPM.
returns

ratio using this law.
measure alpha against that benchmark.
and Controlling Risk, 2nd Edition (New York: McGraw-Hill, 2000).
aversion, and proper alpha coverage.
programming, and quadratic programming.
component VaR, undiversified portfolio VaR, and diversified portfolio VaR.
management.


sponsor risk.
(Hoboken, NJ: John Wiley & Sons, 2003).
measure (Jensen’s alpha), and information ratio.
of these measures.

• Explain how changes in portfolio risk levels can affect the use of the Sharpe ratio to measure performance
compute return due to market timing.
decision, and the aggregate contribution.
of the industry.

each strategy
such a convergence on portfolio diversification strategies.
under management (AUM) in the industry.
Fund Performance 2nd Edition (Hoboken, NJ: Wiley Finance, 2016)
March 5, 2019.
Finance, April 2017.
they can be applied.
• Fraud
adoption of AI and machine learning in financial services.
trading and portfolio management in financial markets; (iv) uses for regulatory compliance.
affect financial stability.
“The Impact of Blockchain Technology on Finance: A Catalyst for Change,” International Center for Moneta
Studies, 2018. (Section 1-Section 3 only)
• Explain and assess the questions to be considered prior to implementing a blockchain solution to any economic ac
• Describe the current regulatory concerns surrounding crypto-finance and assess the steps taken by regulators to a
issues.
“FinTech and market structure in financial services: Market developments and potential financial stability im
Financial Stability Board, February 14, 2019.
• Differentiate between the potential changes to market structure (lending, payments, insurance, trading) and financ
resulting from financial innovation through traditional providers, Fintech providers, Big Tech and third-party tech serv
• Discuss the impact and risks of technological developments in the areas of APIs, mobile banking and cloud compu
systems along with the scope of the EU’s Payment Services Directive.
• Analyze the market structure impact and risks of China’s NPI’s online MMFs in the areas of same day cash availa
guarantee mechanisms and concentration risk along with the effort of Chinese authorities to address these risks.
Stijn Claessens, Jon Frost, Grant Turner, and Feng Zhu, “Fintech credit markets around the world: size, driv
issues,” BIS Quarterly Review, September 23, 2018.
• Compare and evaluate how different jurisdictions have crafted policy and regulatory responses to the Fintech cred
“Sound Practices: Implications of fintech developments for banks and bank supervisors,” Bank for Internat
Settlements (BIS), February 2018.
• Differentiate between the five Basel fintech scenarios and the roles participants (incumbent banks, new banks, Big
firms and service providers) perform and risks they are subject to in each.
• Discuss the Basel disintermediated bank scenario and its impact on incumbent banks’ present business models. I
existing product and funding risks.
• Distinguish practical instances of Basel Committee’s Principles for sound management of operational risk (PSMOR
fintech.
• Distinguish the implications for bank supervisors on regulatory frameworks as a result of fintech along with existing
regimes and regulatory responses.
Tobias Adrian and Tommaso Mancini-Griffoli, “The Rise of Digital Money,” International Monetary Fund (IMF
• Evaluate regulatory and policy actions that could be implemented in response to risks arising from increased adop
• Discuss the history of climate change related risks for the financial sector including the Paris Agreement (2015) an
significance of Article 2.1 c as it pertains to the financial system.
• Distinguish the causes of potential mispricing of climate change risk and the impact of relevant history and data, n
probability distributions, kurtoses, skew, “black swan” events, and risk materialization time horizons on pricing as co
traditional investment risk analysis.
• Discuss recent reporting and disclosure requirements under Article 173 of the French Energy Transition Act and th
European Commission Sustainable Finance Action Plan on the allocation of capital towards sustainable investments
climate and environmental factors in financial institutions’ risk management policies.
2021 Reading
Topic 5
MR–1 (R1.1)
MR–2 (R1.2)
MR–3 (R1.3)
MR–4 (R2.1)
MR–5 (R2.2)
MR–6 (R3)
MR–7 (R4.1)
MR–8 (R4.2)
MR–9 (R4.3)
MR–10 (R5.1)
MR–11 (R5.2)
MR–12 (R5.3)
MR–13 (R5.4)
MR–14 (R5.5)
MR–15 (R6)
MR–16 (R7)
Topic 6
CR–1 (R8.1)
CR–2 (R8.2)
CR–3 (R9)
CR–4 (R10)
CR–5 (R11)
CR–6 (R12.1)
CR–7 (R12.2)
CR–8 (R12.3)
CR–9 (R13.1)
CR–10 (R13.2)
CR–11 (R13.3)
CR–12 (R13.4)
CR–13 (R13.6)
CR–14 (R14)
CR–15 (R15.1)
CR–16 (R15.2)
CR–17 (R16)
CR–18 (R17)
Topic 7
ORR-1 (R18)
ORR-2 (R19)
ORR-3 (R20)
ORR-4 (R21)
ORR-5 (R22)
ORR-6 (R23)
ORR-7 (R24)
ORR-8 (R25)
ORR-9 (R26)
ORR-10 (R27)
ORR-11 (R28)
ORR-12 (R29)
ORR-13 (R30)
ORR-14 (R31)
ORR-15 (R32)
ORR-16 (R33)
ORR-17 (R34)
ORR-18 (R35)
ORR-19 (R36)
ORR-20 (R37)
ORR-21 (R38)
ORR-22 (R39)
ORR-23 (R40)
ORR-24 (R41)
ORR-25 (R42)
ORR-26 (R43)
(NEW) Topic 8
LTR-1 (R44)
LTR-2 (R45)
LTR-3 (R46)
LTR-4 (R47.1)
LTR-5 (R47.2)
LTR-6 (R48)
LTR-7 (R49)
LTR-8 (R50)
LTR-9 (R51)
LTR-10 (R52)
LTR-11 (R53)
LTR-12 (R54.1)
LTR-13 (R54.2)
LTR-14 (R55)
rd, Bank for LTR-15 (R56)
LTR-16 (R57)
LTR-17 (R58)
LTR-18 (R59)
LTR-19 (R60)
Topic 9
IM-1 (R61.1)
IM-2 (R61.2)
IM-3 (R61.3)
IM-4 (R62)
IM-5 (R63.1)
IM-6 (R63.2)
IM-7 (R64)
IM-8 (R65)
IM-9 (R66)
IM-10 (R67)
IM-11 (R68)
Topic 10
[CI-1] (R69)
[CI-2] (R70)
[CI-3] (R71)
[CI-4] (R72)
[CI-5] (R73)
[CI-6] (R74)
[CI-7] (R75
[CI-8] (R76)
[CI-9] (R77)
[CI-10] (R78)
Chapter 3 ................................Estimating Market Risk Measures: An Introduction and Overview
• Interpret quantile-quantile (QQ) plots to identify the characteristics of a distribution.

approaches.

• Evaluate the tradeoffs involved in setting the threshold level when applying the generalized Pareto (GP) distrib


Supervision, Working Paper, No.19, Jan 2011.
in VaR risk factors, and VaR backtesting.



drift.
drift.

dependent volatility.
of options on the underlying asset.

(FRTB), and the motivations for these changes.
expected shortfall using the various horizons.
2013).
expected loss, and time horizon


Kingdom: John Wiley & Sons, 2010).
default, and annualized default rate.
model.
quality.
define their strengths and weaknesses.
of default.
CreditMetrics, and the KMV model.



Jon Gregory, The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital, 4th Edition(We
Chapter 3. Counterparty Risk and Beyond
recovery rate.
• Explain the components of theX-Value Adjustment (xVA) term

how they fit into the framework of the ISDA master agreement.
Chapter 7. Margin (Collateral) and Settlement

initial margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.

• Describe the various regulatory capital requirements.
Chapter 11. Future Value and Exposure

exposure, expected positive exposure and negative exposure, effective exposure, and maximum exposure.
credit exposure.
• Describe the differences between funding exposure and credit exposure.
transfer amount.
Chapter 17. Credit Value Adjustment (CVA)

• Explain the impact of incorporating collateralization into the CVA calculation, including the impact of margin per
thresholds, and initial margins.
• Calculate DVA, BCVA, and BCVA as a spread.
• Identify examples of wrong-way collateral.
• Describe the various wrong-way modeling methods including hazard rate approaches, structural approach
approaches, and jump approaches.
• Explain the implications of central clearing on wrong-way risk.
2013)
activities and risk management for a financial institution.

scoring model.
accuracy ratio (AR) techniques.

bank credit function.
• Describe covered bonds, funding CLOs, and other securitization instruments for funding purposes.
swaps (TRS), asset-backed credit-linked notes (CLN), and their applications.
& Sons, 2010)
distinguish between the three main SPV structures: amortizing, revolving, and master trust.
weighted average coupon(WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for re
structures.
Association (PSA) rate.
New York Staff Reports, no. 318, (March 2008).*
subprime mortgage problems.
“Principles for the Sound Management of Operational Risk,” (Basel Committee on Banking Supervision Pub
implementing an effective operational risk framework.
4 (2006): 8–20.*
both at the macro and the micro level.
operational risk distributions.

management.
2011.
process.
• Explain key challenges to the implementation of an RAF and describe ways that a firm can overcome each ch
Learned only)
• Describe challenges faced by banks with respect to conduct and culture, and explain motivations for banks to
and culture.
• Explain methods by which a bank can improve its corporate culture, and assess progress made by banks in th
• Explain how a bank can structure performance incentives and make staff development decisions to encourage
culture.
• Describe characteristics of a strong risk culture and challenges to the implementation of an effective risk cultur
Marcelo G. Cruz, Gareth W. Peters, and Pavel V. Shevchenko, Fundamental Aspects of Operational Risk and
Analytics: A Handbook of Operational Risk (New York: John Wiley & Sons, 2015)
recoveries, and reporting expected operational losses.
operational risk exposures.
when using scenario analysis.
& Sons, 2010).

positions.
could have been avoided.
(RMBS) during the 2007- 2009 financial downturn.

economic capital approaches to allocate risk capital.
probability, and choosing a confidence level.
different business lines.
March 2009).*
o Risk aggregation
capital, that are not designed for regulatory purposes.
holding companies (BHCs) subject to the Capital Plan Rule.
“Stress Testing Banks,” Til Schuermann, International Journal of Forecasting 30, no. 3, (2014): 717–728
tests.
to manage outsourcing risk.
February 2019.
• Explain best practices recommended for the assessment, management, mitigation and monitoring of money la
these changes
revisions to Basel regulations over time.
• Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit ex
to calculate market risk capital for assets in the trading book.
for the calculation of credit risk capital under Basel II.
• Calculate credit risk capital under Basel II utilizing the IRB approach.
operational risk capital under Basel II.
• Describe the comprehensive risk (CR) capital charge for portfolios of positions that are sensitive to correlations be

• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, including
globally systemically important banks (G-SIBs).
coverage ratio and the net stable funding ratio.
• Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory reforms tha
after the 2007 – 2009 financial crisis.
framework.
loss multiplier, and loss component, and calculate the operational risk capital requirement for a bank using this appr
operational loss data.
Wiley, 2019).
implementation.
• Explain methods that can be used to assess the financial impact of a potential cyber attack and explain ways to
financial resilience.
responsibilities.
• Describe practices for the governance of risks of interconnected third-party service providers.
1)
process.

Metallgesellschaft.

managing liquidity risk.
different types of transactions on a firm’s leverage and balance sheet.
a position to be liquidated over a number of trading days.

liquidity management process.
• Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liq
business.
with other risk models.
actions, monitoring and escalation, data and reporting).
marginal cost, and conditional pricing formulas.
(lifeline) banking.



process.
Working Papers, Bank for International Settlements.
the Cross-Currency Basis,” BIS Quarterly Review.


of diversification benefits, and shortcomings of the CAPM.
returns

using this law.
alpha against that benchmark.
• Explain how to use style analysis to handle time-varying factor exposures.
• Evaluate the motivation for and the methods used for refining alphas in the implementation process.
• Describe neutralization and the different approaches used for refining alphas to be neutral.
• Describe practical issues in portfolio construction, including the determination of an appropriate risk aversion, aver
and proper alpha coverage.
• Describe portfolio revisions and rebalancing, and analyze the tradeoffs between alpha, risk, transaction costs, and
and quadratic programming.
• Define, calculate, and distinguish between the following portfolio VaR measures: diversified and undiversified port
VaR, incremental VaR, marginal VaR, and component VaR.
management.


sponsor risk.
• Explain the use of VaR to check manager compliance and monitor risk.
• Explain how VaR can be used in the development of investment guidelines and for improving the investment proc
NJ: John Wiley & Sons, 2003).
• Describe the three fundamental dimensions behind risk management, and their relation to VaR and trackin
Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 12th Edition (New York, NY: McGraw-Hill, 2020).
measure (Jensen’s alpha), and information ratio and identify the circumstances under which the use of each m
relevant.
these measures.
• Explain the difficulties in measuring the performance of actively managed portfolios.
• Describe performance manipulation and the problems associated with using conventional performance m
return due to market timing.
and the aggregate contribution.
G. Constantinides, M. Harris and R. Stulz. eds., Handbook of the Economics of Finance, Volume 2B (Oxford:

the industry.
under management (AUM) in the industry.
strategy
a convergence on portfolio diversification strategies.
Performance 2nd Edition (Hoboken, NJ: Wiley Finance, 2016)
• Identify reasons for the failures of hedge funds in the past.
• Identify themes and questions investors can consider when evaluating a hedge fund manager.
• Describe criteria that can be evaluated in assessing a hedge fund’s risk management process.
• Explain how due diligence can be performed on a hedge fund’s operational environment.
Stephen G. Dimmock and William C. Gerken: Finding Bernie Madoff: Detecting Fraud by Investment Manage
• Explain the use and efficacy of information disclosures made by investment advisors in predicting fraud.
• Describe the barriers and the costs incurred in implementing fraud prediction methods.
• Discuss ways to improve investors’ ability to use disclosed data to predict fraud.

5, 2019.
April 2017.
be applied.
• Fraud
of AI and machine learning in financial services.
and portfolio management in financial markets; (iv) uses for regulatory compliance.
financial stability.
Chapter 5: Climate Change: Physical Risk and Equity, Global Financial Stability Report: Markets in the Time
International Monetary Fund (IMF), May 2020.
• From the perspective of physical risk, describe the channels through which climate change can affect financial sta
• Explain how climate change and climate risk have affected equity prices and equity valuations.
• Discuss how country characteristics such as insurance penetration and economic development impact the extent
Patrick Bolton, Morgan Despres, Luiz Awazu, Pereira Da Silva, Frédéric Samama, Romain Svartzman, “The G
Banking and Financial Stability in the Age of Climate Change”, Bank for International Settlements (BIS), Jan
- Chapter 3 only)
• Describe the concept of “green swan”, how it differs from “black swan” and why climate change is considered a ‘g
• Explain why climate change is a threat to price stability.
• Explain why climate change is a threat to financial stability by describing the ways physical and transition risks ca
• Discuss the measures that should be considered by members of the financial safety net under the risk, time horiz
resilience approaches as well as the limitations of these measures.
Valentin Haddad, Alan Moreira, and Tyler Mui, “When Selling Becomes Viral: Disruptions in Debt Markets in
and the Fed’s Response”
• Describe the evolution of bond and CDS prices during March-April 2020.
• Compare the developments in debt markets during the Great Financial Crisis of 2008-2009 and during the COVI
• Explain the effects of frictions and arbitrage limitations on price movements in debt markets during March-April 2
• Explain the Fed’s interventions in debt markets during March-April 2020 as well as the rationale for and effects o
“Chapter 1: Global Financial Stability Report: Markets in the Time of COVID-19, International Monetary Fund
• Describe the developments in financial and commodity markets during March-April 2020.
• Discuss the global financial vulnerabilities intensified by the slowdown in economic activity and tightened financia
• Explain the various monetary and financial policy responses to COVID-19 as well as the future steps that should
Financial Crime in Times of COVID-19 – AML and Cyber Resilience Measures”, Financial Stability Institute, M
• Explain the increase of cyber threats faced by financial institutions because of the Covid-19 crisis.
• Explain the cyber resilience measures taken by international and national financial authorities in response to the
• Explain the AML and ATF measures taken by international and national financial authorities in response to the in
Stephen Cecchetti, Kim Schoenholtz, “Replacing LIBOR” https://voxeu.org/article/replacing-libor. Septembe
• Explain the key issues that could cause systemic disruption when LIBOR ends.
• Explain the current state of the transition and the challenges that lie ahead.
• Describe the government institutions’ role in the transition.
“Cyber Risk and the U.S. Financial System: A Pre-Mortem Analysis”, Federal Reserve Bank of New York Sta
2020.
• Explain the direct costs of and the spillovers caused by a cyber-attack.
• Explain how cyber shocks can get amplified through financial networks.
• Discuss the policy responses that can be implemented against cyber events.
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flow at risk.
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Bank for Inte No Changes
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matic disasters affect equity prices.
New Reading
New Reading
ollowing the COVID-19New

outbreak.
Reading
ber threats since the outbreak of Covid-19.

New Reading
and TF risks since the outbreak of Covid-19.
New Reading
New Reading
2021 Reading
Topic 5
MR–1 (R1.1)
MR–2 (R1.2)
MR–3 (R1.3)
MR–4 (R2.1)
MR–5 (R2.2)
MR–6 (R3)
MR–7 (R4.1)
MR–8 (R4.2)
MR–9 (R4.3)
MR–10 (R5.1)
MR–11 (R5.2)
MR–12 (R5.3)
MR–13 (R5.4)
MR–14 (R5.5)
MR–15 (R6)
MR–16 (R7)
Topic 6
CR–1 (R8.1)
CR–2 (R8.2)
CR–3 (R9)
CR–4 (R10)
CR–5 (R11)
CR–6 (R12.1)
CR–7 (R12.2)
CR–8 (R12.3)
CR–9 (R13.1)
CR–10 (R13.2)
CR–11 (R13.3)
CR–12 (R13.4)
CR–14 (R13.6)
CR–15 (R13.7)
CR–16 (R14)
CR–17 (R15.1)
CR–18 (R15.2)
CR–19 (R16)
CR–20 (R17)
Topic 7
ORR-1 (R18)
ORR-2 (R19)
ORR-3 (R20)
ORR-4 (R21)
ORR-5 (R22)
ORR-6 (R23)
ORR-7 (R24)
ORR-8 (R25)
ORR-9 (R26)
ORR-10 (R27)
ORR-11 (R28)
ORR-12 (R29)
ORR-13 (R30)
ORR-14 (R31)
ORR-15 (R32)
ORR-16 (R33)
ORR-17 (R34)
ORR-18 (R35)
ORR-19 (R36)
ORR-20 (R37)
ORR-21 (R38)
ORR-22 (R39)
ORR-23 (R40)
ORR-24 (R41)
ORR-25 (R42)
ORR-26 (R43)
(NEW) Topic 8
LTR-1 (R44)
LTR-2 (R45)
LTR-3 (R46)
LTR-4 (R47.1)
LTR-5 (R47.2)
LTR-6 (R48)
LTR-7 (R49)
LTR-8 (R50)
LTR-9 (R51)
LTR-10 (R52)
LTR-11 (R53)
LTR-12 (R54.1)
LTR-13 (R54.2)
LTR-14 (R55)
LTR-15 (R56)
LTR-16 (R57)
LTR-17 (R58)
LTR-18 (R59)
LTR-19 (R60)
Topic 9
IM-1 (R61.1)
IM-2 (R61.2)
IM-3 (R61.3)
IM-4 (R62)
IM-5 (R63.1)
IM-6 (R63.2)
IM-7 (R64)
IM-8 (R65)
IM-9 (R66)
IM-10 (R67)
IM-11 (R68)
Topic 10
[CI-1] (R68)
[CI-2] (R69)
[CI-3] (R70)
[CI-4] (R71)
[CI-5] (R72)
[CI-6] (R73)
[CI-7] (R74)
[CI-8] (R75)
[CI-10] (R77)
[CI-9] (R76)

• Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered historical simula


19, Jan 2011.
VaR backtesting.





underlying asset.
• Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of the Tradin
various horizons.
• Explain the FRTB revisions to Basel regulations in the following areas
horizon

Gerhard Schroeck, Risk Management & Value Creation in Financial Institutions (New York, NY: John Wiley & Sons, 200
• Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and
& Sons, 2010).
• Describe a rating migration matrix and calculate the probability of default, cumulative probability of default, marginal proba
default rate.
• Apply the Merton model to calculate default probability and the distance to default and describe the limitations of using th
• Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample of firms
• Describe the use of a cash flow simulation model in assigning rating and default probability, and explain the limitations of
• Describe the application of heuristic approaches, numeric approaches, and artificial neural networks in modeling default r
weaknesses.



• Describe credit value adjustment (CVA) and compare the use of CVA and credit limits in evaluating and mitigating counterpar
transfer amount and rounding, haircuts, credit quality, and credit support amount.




techniques.


main SPV structures: amortizing, revolving, and master trust.
micro level.
distributions.
James Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition (Hoboken, NJ: John Wiley & Sons,
• Describe the role and responsibilities of a chief risk officer (CRO) and assess how the CRO should interact with other senior m
“Implementing Robust Risk Appetite Frameworks to Strengthen Financial Institutions”, Institute of International Finan
• Describe best practices for the implementation and communication of a risk appetite framework (RAF) at a firm.
• Explain the relationship between a firm’s RAF and its risk culture, and between the RAF and a firm’s strategy and
• Explain key challenges to the implementation of an RAF and describe ways that a firm can overcome each challenge.
• Assess the role of stress testing within an RAF, and describe challenges in aggregating firm-wide risk exposures.
“Banking Conduct and Culture: A Permanent Mindset Change,” G30 Working Group, 2018. (Introduction through Lesso
• Describe challenges faced by banks with respect to conduct and culture, and explain motivations for banks to improve the
• Explain methods by which a bank can improve its corporate culture, and assess progress made by banks in this area.
• Explain how a bank can structure performance incentives and make staff development decisions to encourage a
• Describe characteristics of a strong risk culture and challenges to the implementation of an effective risk culture.
analysis.
Wiley & Sons, 2009)

avoided.
• Explain major defects in model assumptions that led to the underestimation of systematic risk for residential mortgage backed
• Define, compare and contrast risk capital, economic capital and regulatory capital, and explain methods and motivations for u
to allocate risk capital.
o Risk aggregation
risk.
Mark Carey “Management of Risks Associated with Money Laundering and Financing of Terrorism,” GARP Risk Institu
• Explain best practices recommended for the assessment, management, mitigation and monitoring of money laundering a
risks.
John C. Hull, Risk Management and Financial Institutions, 5th Edition (Hoboken, NJ: John Wiley & Sons, 2018)
• Describe changes to the regulation of OTC derivatives which took place after the 2007-2009 financial crisis and explain the im
• Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and explain the rea
• Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit exposures an
capital for assets in the trading book.
• Compare the standardized IRB approach, the Foundation Internal Ratings-Based (IRB) approach, and the advanced IRB
credit risk capital under Basel II.
• Compare the basic indicator approach, the standardized approach, and the Advanced Measurement Approach for the ca
under Basel II.
Mark Carey, “Solvency, Liquidity and Other Regulation After the Global Financial Crisis,” GARP Risk Institute, April 20
• Describe and calculate the stressed value-at-risk measure introduced in Basel 2.5, and calculate the market risk capital char
• Describe the comprehensive risk (CR) capital charge for portfolios of positions that are sensitive to correlations between defa
• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, including special rul
important banks (G-SIBs).
stable funding ratio.
• Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory reforms that were intro
financial crisis.
• Explain the motivations for revising the Basel III framework and the goals and impacts of the December 2017 reforms to the B
• Describe the revised output floor introduced as part of the Basel III reforms and approaches to be used when calculating the
• Explain the elements of the new standardized approach to measure operational risk capital, including the business indicator,
component, and calculate the operational risk capital requirement for a bank using this approach.
• Compare the SMA to earlier methods of calculating operational risk capital, including the Advanced Measurement Approache
Andrew Coburn, Eireann Leverett, and Gordon Woo, Solving Cyber Risk: Protecting Your Company and Society (Hobo
• Describe elements of an effective cyber-resilience framework and explain ways that an organization can become more cyb
• Explain resilient security approaches that can be used to increase a firm’s cyber resilience, and describe challenges to the
• Explain methods that can be used to assess the financial impact of a potential cyber attack & explain ways to increase a fir
“Cyber-resilience: Range of practices,” (Basel Committee on Banking Supervision Publication, December 2018).
• Describe current practices by banks and supervisors in the governance of a cyber risk management framework, including r
• Explain methods for supervising cyber-resilience, testing and incident response approaches, and cybersecurity and resilien
• Explain and assess current practices for the sharing of cybersecurity information between different types of institutions.
“Building the UK financial sector’s operational resilience,” (Bank of England, July 2018). (Exclude Section 3, Include o
• Describe operational resilience and describe threats and challenges to the operational resilience of a financial institution.
• Explain recommended principles, including tools and metrics, for maintaining strong operational resilience at financial instit
• Define impact tolerance; explain best practices and potential benefits for establishing the impact tolerance for a firm or a bu


February 2011).*
“Basel III: Finalising post-crisis reforms,” (Basel Committee on Banking Supervision Publication, December 2017).
• Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti Goldfields, an
• Differentiate between sources of liquidity risk and describe specific challenges faced by different types of financial instituti
• Summarize the asset-liability management process at a fractional reserve bank, including the process of liquidity transform
• 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 (including the leverage effect), and distinguish the im
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity adjustmen
• Discuss interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic ris
Peter Rose, Sylvia Hudgins, Bank Management & Financial Services, Ninth Edition (New York, NY: McGraw-Hill, 2013)
• Compare various money market and capital market instruments and discuss their advantages and disadvantages.

• Calculate a bank’s net liquidity position and explain factors that affect the supply and demand of liquidity at a bank.
• Estimate a bank’s liquidity needs through three methods (sources and uses of funds, structure of funds, and liquidity indic
Antonio Castagna, Francesco Fede, Measuring and Managing Liquidity Risk (United Kingdom, John Wiley & Sons, 201
• Describe and provide examples of liquidity options, and explain the impact of liquidity options on a bank’s liquidity position
process.
Darrell Duffie, 2010. “The Failure Mechanics of Dealer Banks,” Journal of Economic Perspectives 24:1, 51-72.
• Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face in each lin
• Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.
• Differentiate between various types of liquidity, including funding, operational, strategic, contingent, and restricted liquidity
• Discuss liquidity stress test design issues such as scope, scenario development, assumptions, outputs, governance, and
• Assess the key components of a contingency funding plan (governance and oversight, scenarios and liquidity gap analysis,
escalation, data and reporting).
• Compare different methods used to determine the pricing of deposits and calculate the price of a deposit account using c
• Explain challenges faced by banks that offer deposit accounts, including deposit insurance, disclosures, overdraft protection

• Discuss common motivations for entering into repos, including their use in cash management and liquidity management.
• Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the (2007 - 2009) cred
• Identify the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an au
Joel Grant, 2011. “Liquidity Transfer Pricing: A Guide to Better Practice,” Occasional Paper, Financial Stability Board,
• Discuss the process of liquidity transfer pricing (LTP) and identify best practices for the governance and implementation o
• Compare the various approaches to liquidity transfer pricing (zero cost, average cost, matched maturity marginal cost).
Patrick McGuire, Gotz von Peter, 2009. “The US Dollar Shortage in Global Banking and the International Policy Respon
for International Settlements.
• Evaluate the importance of assessing maturity/currency mismatch across the balance sheets of consolidated entities.
• Discuss how central bank swap agreements overcame challenges commonly associated with international lenders of last
Claudio Borio, Robert McCauley, Patrick McGuire, Vladyslav Sushko, 2016. “Covered Interest Rate Parity Lost: Unders
Basis,” BIS Quarterly Review.
Chapter 7. Risk management for Changing Interest Rates: Asset-Liability Management and Duration Techniques
• Assess methods of mitigating volatility risk in a portfolio, and describe challenges that arise when managing volatility risk.

• Explain the impact of benchmark choice on alpha, and describe characteristics of an effective benchmark to measure alpha.
benchmark.
coverage.
programming.

Sons, 2003).
and information ratio.

timing.
contribution.

in the industry.
Stephen G. Dimmock and William C. Gerken: Finding Bernie Madoff: Detecting Fraud by Investment Managers (2011)

“The Impact of Blockchain Technology on Finance: A Catalyst for Change,” International Center for Monetary and Ban
Section 3 only)
• Explain and assess the questions to be considered prior to implementing a blockchain solution to any economic activity.
• Describe the current regulatory concerns surrounding crypto-finance and assess the steps taken by regulators to address the
“FinTech and market structure in financial services: Market developments and potential financial stability implications
February 14, 2019.
• Differentiate between the potential changes to market structure (lending, payments, insurance, trading) and financial stability
innovation through traditional providers, Fintech providers, Big Tech and third-party tech servicers.
• Discuss the impact and risks of technological developments in the areas of APIs, mobile banking and cloud computing on pay
scope of the EU’s Payment Services Directive.
• Analyze the market structure impact and risks of China’s NPI’s online MMFs in the areas of same day cash availability, depos
concentration risk along with the effort of Chinese authorities to address these risks.
Stijn Claessens, Jon Frost, Grant Turner, and Feng Zhu, “Fintech credit markets around the world: size, drivers and po
Review, September 23, 2018.
• Compare and evaluate how different jurisdictions have crafted policy and regulatory responses to the Fintech credit market.
“Sound Practices: Implications of fintech developments for banks and bank supervisors,” Bank for International Settle
• Differentiate between the five Basel fintech scenarios and the roles participants (incumbent banks, new banks, Big Tech, finte
perform and risks they are subject to in each.
• Discuss the Basel disintermediated bank scenario and its impact on incumbent banks’ present business models. Identify area
risks.
• Distinguish practical instances of Basel Committee’s Principles for sound management of operational risk (PSMOR) as applie
• Distinguish the implications for bank supervisors on regulatory frameworks as a result of fintech along with existing licensing
Tobias Adrian and Tommaso Mancini-Griffoli, “The Rise of Digital Money,” International Monetary Fund (IMF), July 201
• Evaluate regulatory and policy actions that could be implemented in response to risks arising from increased adoption of e-m
• Fraud
• Describe the drivers that have contributed to the growing use of FinTech and the supply and demand factors that have spurre
learning in financial services.
• Describe the use of AI and machine learning in the following cases: (i) customer -focused uses; (ii) operations focused uses;
• Describe the possible effects and potential benefits and risks of AI and machine learning on financial markets and how they m
Andreas Schrimpf and Vladyslav Sushko, “Beyond LIBOR: a primer on the new benchmark rates,” BIS Quarterly Revie
• Discuss the history of climate change related risks for the financial sector including the Paris Agreement (2015) and distinguis
as it pertains to the financial system.
• Distinguish the causes of potential mispricing of climate change risk and the impact of relevant history and data, non-normal p
skew, “black swan” events, and risk materialization time horizons on pricing as compared to traditional investment risk analysis.
• Discuss recent reporting and disclosure requirements under Article 173 of the French Energy Transition Act and the impact o
Sustainable Finance Action Plan on the allocation of capital towards sustainable investments and inclusion of climate and envir
institutions’ risk management policies.
2022 Reading
Topic 5
MR–1 (R1.1)
MR–2 (R1.2)
MR–3 (R1.3)
MR–4 (R2.1)
MR–5 (R2.2)
MR–6 (R3)
MR–7 (R4.1)
MR–8 (R4.2)
MR–9 (R4.3)
MR–10 (R5.1)
MR–11 (R5.2)
MR–12 (R5.3)
MR–13 (R5.4)
MR–14 (R5.5)
MR–15 (R6)
MR–16 (R7)
Topic 6
CR–1 (R8.1)
CR–2 (R8.2)
CR–3 (R9)
CR–4 (R10)
CR–5 (R11)
CR–6 (R12.1)
CR–7 (R12.2)
CR–8 (R12.3)
CR–9 (R13.1)
CR–10 (R13.2)
CR–11 (R13.3)
CR–12 (R13.4)
CR–13 (R13.6)
CR–14 (R14)
CR–15 (R15.1)
CR–16 (R15.2)
CR–17 (R16)
CR–18 (R17)
Topic 7
ORR-1 (R18)
ORR-2 (R19)
ORR-3 (R20)
ORR-4 (R21)
ORR-5 (R22)
ORR-6 (R23)
ORR-7 (R24)
ORR-8 (R25)
ORR-9 (R26)
ORR-10 (R27)
ORR-11 (R28)
ORR-12 (R29)
ORR-13 (R30)
ORR-14 (R31)
ORR-15 (R32)
ORR-16 (R33)
ORR-17 (R34)
ORR-18 (R35)
ORR-19 (R36)
ORR-20 (R37)
ORR-21 (R38)
ORR-22 (R39)
ORR-23 (R40)
ORR-24 (R41)
ORR-25 (R42)
ORR-26 (R43)
ORR-27 (R44)
(NEW) Topic 8
LTR-1 (R45)
LTR-2 (R46)
LTR-3 (R47)
LTR-4 (R48)
LTR-5 (R48.2)
LTR-6 (R49)
LTR-7 (R50)
LTR-8 (R51)
LTR-9 (R52)
LTR-10 (R53)
LTR-11 (R54)
LTR-12 (R55.1)
LTR-13 (R55.2)
LTR-14 (R56)
Settlements. LTR-15 (R57)
LTR-16 (R58)
LTR-17 (R59)
LTR-18 (R60)
LTR-19 (R61)
Topic 9
IM-1 (R62.1)
IM-2 (R62.2)
IM-3 (R62.3)
IM-4 (R63)
IM-5 (R64.1)
IM-6 (R64.2)
IM-7 (R65)
IM-8 (R66)
IM-9 (R67)
IM-10 (R68)
IM-11 (R69)
Topic 10
[CI-1] (R70)
[CI-2] (R71)
[CI-3] (R72)
[CI-4] (R73)
[CI-5] (R74)
[CI-6] (R75)
[CI-7] (R76)
[CI-8] (R77)


• Evaluate the tradeoffs involved in setting the threshold level when applying the generalized Pareto (GP) distribution.
• Explain the multivariate EVT for risk management.

No.19, Jan 2011.





underlying asset.
various horizons.
horizon

default rate.
and weaknesses.
model.


Jon Gregory, The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital, 4th Edition(West Sussex,
2020).


exposure and negative exposure, effective expected positive exposure, and maximum exposure.

• Explain the impact of incorporating collateralization into the CVA calculation, including the impact of margin period of risk, thre

• Describe the various wrong-way modeling methods including hazard rate approaches, structural approaches, parametric appr
techniques.


problems.
“Principles for the Sound Management of Operational Risk,” (Basel Committee on Banking Supervision Publication, Ju
the micro level.
distributions.
• Describe challenges faced by banks with respect to conduct and culture, and explain motivations for banks to improve their c
• Assess the role of regulators in encouraging strong conduct and culture at banks, and provide examples of regulato
Marcelo G. Cruz, Gareth W. Peters, and Pavel V. Shevchenko, Fundamental Aspects of Operational Risk and Insurance
Operational Risk (New York: John Wiley & Sons, 2015)
analysis.
Wiley & Sons, 2009)

avoided.

o Risk aggregation
outsourcing risk.
risks.
risk capital for assets in the trading book.
• Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory reforms that were intro
financial crisis.
• Explain methods that can be used to assess the financial impact of a potential cyber attack and explain ways to increase a
• Describe current practices by banks and supervisors in the governance of a cyber risk management framework, including r
• Explain methods for supervising cyber-resilience, testing and incident response approaches, and cybersecurity and resilien
“Operational resilience: Impact tolerance for important business services,” (Bank of England Policy Statement 6/21, M
2 and 3)
• Describe an impact tolerance; explain best practices and potential benefits for establishing the impact tolerance for a busine
• Provide examples of important business services and explain criteria that firms should use to determine their important bus
• Explain tools and processes, including mapping and scenario testing, that financial institutions should use to improve their o
within their impact tolerance.
• Describe the governance of an operational resilience policy, including the relationships between operational resilience and
tolerance, continuity planning, and outsourcing to third-party providers.
“Principles for Operational Resilience,” (Basel Committee on Banking Supervision Publication, March 2021).
• Define and describe operational resilience and explain essential elements of operational resilience
• Explain recommended principles that banks should follow to implement an effective operational resilience approach

• Differentiate between sources of liquidity risk and describe specific challenges faced by different types of financial institutions
• Summarize the asset-liability management process at a fractional reserve bank, including the process of liquidity transformatio
• Describe the relationship between leverage and a firm’s return profile (including the leverage effect), and distinguish the impac
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity adjustment to V
• Discuss interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.

process.
• Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, cash fl
models.
and escalation, data and reporting).

• Distinguish between the various sources of non-deposit liabilities at a bank.
Settlements.

benchmark.
• Describe practical issues in portfolio construction, including the determination of an appropriate risk aversion, aversions to sp
coverage.
• Describe portfolio revisions and rebalancing, and analyze the tradeoffs between alpha, risk, transaction costs, and time horizo
programming.
• Define, calculate, and distinguish between the following portfolio VaR measures: diversified and undiversified portfolio VaR,
marginal VaR, and component VaR.

• Explain how VaR can be used in the development of investment guidelines and for improving the investment process.
Sons, 2003).
• Describe the three fundamental dimensions behind risk management, and their relation to VaR and tracking error.
• Describe the objectives of performance measurement tools
and information ratio and identify the circumstances under which the use of each measure is most relevant.
• Describe performance manipulation and the problems associated with using conventional performance measures.
timing.
contribution.
G. Constantinides, M. Harris and R. Stulz. eds., Handbook of the Economics of Finance, Volume 2B (Oxford: Elsevier, 2


Aziz, S. and M. Dowling (2019). “Machine Learning and AI for Risk Management”, in T. Lynn, G. Mooney, P. Rosati, and
Disrupting Finance: FinTech and Strategy in the 21st Century, Palgrave
• Explain the distinctions between the two broad categories of machine learning and describe the techniques used within each
• Analyze and discuss the application of AI and machine learning techniques in the following areas:
• Credit Risk
• Market Risk
• Operational Risk
• Regulatory Compliance
• Describe the role and potential benefits of AI and machine learning techniques in risk management
• Identify and describe the limitations and challenges of using AI and machine learning techniques in risk management
"Artificial Intelligence Risk & Governance," Artificial Intelligence/Machine Learning Risk & Security Working Group (AI
• Identify and discuss the categories of potential risks associated with the use of AI by financial firms and describe the risks that
category
• Describe the four core components of AI governance and recommended practices related to each.
• Explain how issues related to interpretability and discrimination can arise from the use of AI by financial firms.
• Describe practices financial firms can adopt to mitigate AI risks.
"Covid-19 and cyber risk in the financial sector", BIS Bulletin No 37, January 2021
• Define cyber risk and describe the elements that constitute it.
• Describe and compare causes of cyber risks and methods of enacting cyber-attacks.
• Identify and explain the effect COVID-19 has had on the level of cyber threat.
• Assess how the financial sector in particular has been threatened by cyber risk during the pandemic.
• Identify changes in cyber risk landscape and ways to mitigate risks to financial stability.
"Holistic Review of the March Market Turmoil", Chapters 1-4, FSB, 17 November 2020
• Identify the key market developments that took place during the March 2020 Covid-19 market turmoil, conditions that were pr
and their effects on the financial markets and its participants. Describe how financial participants sought safety and the stages b
stress spread through the financial system as the pandemic unfolded.
• Describe the origins and backdrop of the March 2020 Covid-19 market stress and the systemic weaknesses existing prior to t
pandemic that contributed to systemic fragility.
• Describe the role that non-bank financial institutions' (NBFIs), reliance on US dollar funding, and the demand for liquidity and
risk held outside the banking sector had on the resilience of the global financial system during the pandemic.
• Describe the impact of the pandemic and its propagation on the financial markets, including money market funds (MMF), CCP
open ended funds, ETFs, short-term funding markets, repos, and the government and corporate bond markets.
• Describe the public-sector policy responses to restore financial market functioning during the Covid-19 market turmoil.
• Describe the lessons learned from the March 2020 Covid-19 market turmoil.
"LIBOR transition Case studies for navigating conduct risks", FMSB, June 2020 (26 pp.)
• Discuss regulatory expectations on LIBOR transition and how these expectations can help market participants in their manag
conduct risk arising from the transition.
• Analyze the risks of LIBOR transition from both sell-side and buy-side perspectives and give examples of good practice obse
Andreas Schrimpf/Vladyslav Sushko, “Beyond LIBOR: a primer on the new benchmark rates,” BIS Quarterly Review, M
"Climate-related risk drivers and their transmission channels", BIS, April 2021
• Describe climate-related risk drivers and explain how those drivers give rise to different types of risks for banks.
• Compare physical and transition risk drivers related to climate change.
• Assess the potential impact of different microeconomic and macroeconomic drivers of climate risk.
• Describe and assess factors that can amplify the impact of climate-related risks on banks as well as potential mitigants for the
"The rise of digital money" (IMF Tobias Adrian and Tommaso Mancini-Griffoli July 2019)
• Describe and compare different attributes of means of payment.
• Describe the risks faced by the banking sector as e-money adoption increases and identify means of mitigating those risks.
• Explain reasons for and characteristics contributing to rapid global adoption of e-money.
• Evaluate effects of different scenarios of e-money adoption on the banking sector.
• Discuss regulatory and policy actions that could be implemented in response to risks arising from increased adoption of e-mo
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2022 Reading
Topic 5
MR–1 (R1.1)
MR–2 (R1.2)
MR–3 (R1.3)
MR–4 (R2.1)
MR–5 (R2.2)
MR–6 (R3)
MR–7 (R4.1)
MR–8 (R4.2)
MR–9 (R4.3)
MR–10 (R5.1)
MR–11 (R5.2)
MR–12 (R5.3)
MR–13 (R5.4)
MR–14 (R5.5)
MR–15 (R6)
MR–16 (R7)
Topic 6
CR–1 (R8.1)
CR–2 (R8.2)
CR–3 (R9)
CR–4 (R10)
CR–5 (R11)
CR–6 (R12.1)
CR–7 (R12.2)
CR–8 (R12.3)
CR–9 (R13.1)
CR–10 (R13.2)
CR–11 (R13.3)
CR–12 (R13.4)
CR–13 (R13.6)
CR–14 (R14)
CR–15 (R15.1)
CR–16 (R15.2)
CR–17 (R16)
CR–18 (R17)
Topic 7
ORR-24
ORR-16
ORR-8 (R25)
ORR-15 (R32)
ORR-12 (R29)
ORR-13 (R30)
ORR-14 (R31)
ORR-19 (R36)
ORR-20 (R37)
ORR-21 (R38)
ORR-22 (R39)
ORR-25 (R42)
ORR-27 (R44)
ORR-1 (R18)
ORR-2 (R19)
ORR-3 (R20)
ORR-4 (R21)
ORR-5 (R22)
ORR-6 (R23)
ORR-7 (R24)
ORR-9 (R26)
ORR-10 (R27)
ORR-11 (R28)
ORR-17 (R34)
ORR-18 (R35)
ORR-23 (R40)
ORR-26 (R43)
(NEW) Topic 8
LTR-1 (R45)
LTR-2 (R46)
LTR-3 (R47)
LTR-4 (R48)
LTR-5 (R48.2)
LTR-6 (R49)
LTR-7 (R50)
LTR-8 (R51)
LTR-9 (R52)
LTR-10 (R53)
LTR-11 (R54)
LTR-12 (R55.1)
LTR-13 (R55.2)
LTR-14 (R56)
LTR-15 (R57)
LTR-16 (R58)
LTR-17 (R59)
LTR-18 (R60)
LTR-19 (R61)
Topic 9
IM-1 (R62.1)
IM-2 (R62.2)
IM-3 (R62.3)
IM-4 (R63)
IM-5 (R64.1)
IM-6 (R64.2)
IM-7 (R65)
IM-8 (R66)
IM-9 (R67)
IM-10 (R68)
IM-11 (R69)
Topic 10
[CI-1] (R70)
[CI-2] (R71)
[CI-7] (R76)
[CI-3] (R72)
[CI-4] (R73)
[CI-5] (R74)
[CI-6] (R75)
[CI-8] (R77)


• Evaluate the tradeoffs involved in setting the threshold level when applying the generalized Pareto (GP) distribution.

backtesting.




changes.
horizons.

2010).



the ISDA master agreement.

amount and rounding, haircuts, credit quality, and credit support amount.


negative exposure, effective expected positive exposure, and maximum exposure.

• Describe the various wrong-way modeling methods including hazard rate approaches, structural approaches, parametric appr
financial institution.

linked notes (CLN), and their applications.

structures: amortizing, revolving, and master trust.
weighted average maturity (WAM), and the weighted average life (WAL) for relevant securitized structures.
(March 2008).*

• Describe current practices by banks and supervisors in the governance of a cyber risk management framework, including role
• Explain methods for supervising cyber-resilience, testing and incident response approaches, and cybersecurity and resilience
risk capital.
confidence level.
o Risk aggregation
regulatory purposes.
System, August 2013
the Capital Plan Rule.
time.
assets in the trading book.
II.
SIBs).
funding ratio.
• Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory reforms that wer
crisis.
and calculate the operational risk capital requirement for a bank using this approach.
“Operational resilience: Impact tolerance for important business services,” (Bank of England Policy Statement 6/21, M
• Describe an impact tolerance; explain best practices and potential benefits for establishing the impact tolerance for a busine
• Provide examples of important business services and explain criteria that firms should use to determine their important bus
• Explain tools and processes, including mapping and scenario testing, that financial institutions should use to improve their o
impact tolerance.
• Describe the governance of an operational resilience policy, including the relationships between operational resilience and
continuity planning, and outsourcing to third-party providers.

“Principles for the Sound Management of Operational Risk,” (Basel Committee on Banking Supervision Publication, Ju
risk framework.
• Describe challenges faced by banks with respect to conduct and culture, and explain motivations for banks to improve their c
• Assess the role of regulators in encouraging strong conduct and culture at banks, and provide examples of regulato
Marcelo G. Cruz, Gareth W. Peters, and Pavel V. Shevchenko, Fundamental Aspects of Operational Risk and Insurance
(New York: John Wiley & Sons, 2015)
operational losses.
2009)
financial downturn.
• Explain methods that can be used to assess the financial impact of a potential cyber attack and explain ways to increase a
“Principles for Operational Resilience,” (Basel Committee on Banking Supervision Publication, March 2021).
• Define and describe operational resilience and explain essential elements of operational resilience
• Explain recommended principles that banks should follow to implement an effective operational resilience approach
• Summarize the asset-liability management process at a fractional reserve bank, including the process of liquidity transformatio
• Describe the relationship between leverage and a firm’s return profile (including the leverage effect), and distinguish the impac
leverage and balance sheet.
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity adjustment to V
number of trading days.

• Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, cash fl
data and reporting).
formulas.

International Settlements.
Quarterly Review.
shortcomings of the CAPM.


York: McGraw-Hill, 2000).
VaR, and component VaR.

Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Approach (

information ratio and identify the circumstances under which the use of each measure is most relevant.
industry.
diversification strategies.
(Hoboken, NJ: Wiley Finance, 2016)

FinTech and Strategy in the 21st Century, Palgrave
• Credit Risk
• Market Risk
• Identify and discuss the categories of potential risks associated with the use of AI by financial firms and describe the risks that
"Covid-19 and cyber risk in the financial sector", BIS Bulletin No 37, January 2021
• Define cyber risk and describe the elements that constitute it.
• Describe and compare causes of cyber risks and methods of enacting cyber-attacks.
• Identify and explain the effect COVID-19 has had on the level of cyber threat.
• Assess how the financial sector in particular has been threatened by cyber risk during the pandemic.
• Identify changes in cyber risk landscape and ways to mitigate risks to financial stability.
"Holistic Review of the March Market Turmoil", Chapters 1-4, FSB, 17 November 2020
• Identify the key market developments that took place during the March 2020 Covid-19 market turmoil, conditions that were pr
and their effects on the financial markets and its participants. Describe how financial participants sought safety and the stages b
stress spread through the financial system as the pandemic unfolded.
• Describe the origins and backdrop of the March 2020 Covid-19 market stress and the systemic weaknesses existing prior to t
pandemic that contributed to systemic fragility.
• Describe the role that non-bank financial institutions' (NBFIs), reliance on US dollar funding, and the demand for liquidity and
risk held outside the banking sector had on the resilience of the global financial system during the pandemic.
• Describe the impact of the pandemic and its propagation on the financial markets, including money market funds (MMF), CCP
open ended funds, ETFs, short-term funding markets, repos, and the government and corporate bond markets.
• Describe the public-sector policy responses to restore financial market functioning during the Covid-19 market turmoil.
• Describe the lessons learned from the March 2020 Covid-19 market turmoil.
"LIBOR transition Case studies for navigating conduct risks", FMSB, June 2020 (26 pp.)
• Discuss regulatory expectations on LIBOR transition and how these expectations can help market participants in their manag
conduct risk arising from the transition.
• Analyze the risks of LIBOR transition from both sell-side and buy-side perspectives and give examples of good practice obse
Andreas Schrimpf/Vladyslav Sushko, “Beyond LIBOR: a primer on the new benchmark rates,” BIS Quarterly Review, M

"The rise of digital money" (IMF Tobias Adrian and Tommaso Mancini-Griffoli July 2019)
• Describe and compare different attributes of means of payment.
• Describe the risks faced by the banking sector as e-money adoption increases and identify means of mitigating those risks.
• Explain reasons for and characteristics contributing to rapid global adoption of e-money.
• Evaluate effects of different scenarios of e-money adoption on the banking sector.
• Discuss regulatory and policy actions that could be implemented in response to risks arising from increased adoption of e-mo
2023 Reading
Topic 5
MR–1
MR–2
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MR–13
MR–14
MR–15
MR–16
Topic 6
CR–1
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CR–6
CR–7
CR–8
CR–9
CR–10
CR–11
CR–12
CR–13
CR–14
CR–15
CR–16
CR–17
CR–18
Topic 7
ORR-1
ORR-2
ORR-3
ORR-4
ORR-5
ORR-6
ORR-7
ORR-8
ORR-9
ORR-10
ORR-11
ORR-12
ORR-13
ORR-14
ORR-15
ORR-16
ORR-17
ORR-18
ORR-19
ORR-20
ORR-21
ORR-22
ORR-23
ORR-24
(NEW) Topic 8
LTR-1
LTR-2
LTR-3
LTR-4
LTR-5
LTR-6
LTR-7
LTR-8
LTR-9
LTR-10
LTR-11
LTR-12
LTR-13
LTR-14
LTR-15
LTR-16
LTR-17
LTR-18
LTR-19
Topic 9
IM-1
IM-2
IM-3
IM-4
IM-5
IM-6
IM-7
IM-8
IM-9
IM-10
IM-11
Topic 10
[CI-1]
[CI-2]
[CI-3]
[CI-4]
[CI-5]
[CI-6]
[CI-7]
[CI-8]

• Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered historical simulation

• Compare and contrast generalized extreme value and POT approaches to estimating extreme risks.
• Discuss the application of the generalized Pareto (GP) distribution in the POT approach.
• Identify and describe Type I and Type II errors in the context of a backtesting process.

• Explain and demonstrate how the mapping process captures general and specific risks.
• Explain how VaR can be computed and used relative to a performance benchmark.
No.19, Jan 2011.
• Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varyi
• Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management fram

• Explain the purpose of copula functions and how they are applied in finance.

• Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple periods
• Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed incom


underlying asset.
• Explain the impact of the volatility smile on the calculation of an option’s Greek letter risk measures.
various horizons.
horizon

• Explain the capital adequacy, asset quality, management, earnings, and liquidity (CAMEL) system used for evaluating the fin
default rate.
weaknesses.
model.


• Describe the treatment of excess spread in a securitization structure and estimate the value of the overcollateralizati
year.
2020).
• Provide examples of trade compression of derivative positions, calculate net notional exposure amount, and identify
contract position in a trade compression.

• Calculate the credit support amount (margin) under various scenarios.

exposure and negative exposure, effective expected positive exposure, and maximum exposure.
• Explain the general impact of aggregation on exposure, and the impact of aggregation on exposure when there is co
values.

• Explain the distinctions between unilateral CVA (UCVA) and BCVA, and between unilateral DVA (UDVA) and BCVA.
• Describe the various wrong-way modeling methods including hazard rate approaches, structural approaches, parametric app
techniques.

• Discuss the flaws in the securitization of subprime mortgages prior to the financial crisis of 2007-2009

problems.
• Describe the various features of subprime MBS and explain how these features are designed to protect investors fro
mortgage loans.
• Distinguish between corporate credit ratings and asset-backed securities (ABS) credit ratings.
• Explain how through-the-cycle ABS rating can amplify the housing cycle
Global Association of Risk Professionals. Operational Risk and Resiliency, New York, NY: Pearson, 2022.
Chapter 1. Introduction to Operational Risk and Resilience
• Describe an operational risk management framework and assess the types of risks that can fall within the scope of such a fra
• Explain characteristics of operational risk exposures and operational loss events, and challenges that can arise in managing
characteristics.
• Describe operational resilience, identify the elements of an operational resilience framework, and summarize regulatory expe
resilience.
Chapter 2. Risk Governance

• Explain the Basel regulatory expectations for the governance of an operational risk management framework.
• Describe and compare the roles of different committees and the board of directors in operational risk governance.
• Describe the “three lines of defense” model for operational risk governance and compare roles and responsibilities for each li
• Explain best practices and regulatory expectations for the development of a risk appetite for operational risk and for a strong
Chapter 3. Risk Identification

• Compare different top-down and bottom-up approaches and tools for identifying operational risks.
• Describe best practices in the process of scenario analysis for operational risk.
• Describe and apply an operational risk taxonomy and give examples of different taxonomies of operational risks.
• Describe and apply the Level 1, 2, and 3 categories in the Basel operational risk taxonomy.
Chapter 4. Risk Measurement and Assessment

• Explain best practices for the collection of operational loss data and reporting of operational loss incidents, including regulato
• Explain operational risk-assessment processes and tools, including risk control self-assessments (RCSAs), likelihood assess
• Describe the differences among key risk indicators (KRIs), key performance indicators (KPIs), and key control indicators (KCI
• Describe and distinguish between the different quantitative approaches and models used to analyze operational risk.
• Estimate operational risk exposures based on the fault tree model given probability assumptions.
• Describe approaches used to determine the level of operational risk capital for economic capital purposes, including their app
• Describe and explain the steps to ensure a strong level of operational resilience, and to test the operational resilience of impo
Chapter 5. Risk Mitigation

• Explain different ways firms address their operational risk exposures.
• Describe and provide examples of different types of internal controls, and explain the process of internal control design and c
• Describe methods to improve the quality of an operational process and reduce the potential for human error.
• Explain how operational risk can arise with new products, new business initiatives, or mergers and acquisitions, and describe
• Identify and describe approaches firms should use to mitigate the impact of operational risk events.
• Describe methods for the transfer of operational risks and the management of reputational risk, and assess their effectivenes
Chapter 6. Risk Reporting

• Identify roles and responsibilities of different organizational committees, and explain how risk reports should be developed for
function.
• Describe components of operational risk reports and explain best practices in operational risk reporting.
• Describe challenges to reporting operational risks, including characteristics of operational loss data, and explain ways to over
• Explain best practices for reporting risk exposures to regulators and external stakeholders.
Chapter 7: Integrated Risk Management

• Describe the role of risk governance, risk appetite, and risk culture in the context of an enterprise risk management
(ERM) framework
• Summarize the role of Basel regulatory capital and the process of determining internal economic capital.
• Describe elements of a stress-testing framework for financial institutions and explain best practices for stress testing.
• Explain challenges and considerations when developing and implementing models used in stress testing operational risk.
• Describe current practices by banks and supervisors in the governance of a cyber risk management framework, including role
• Explain methods for supervising cyber-resilience, testing and incident response approaches, and cybersecurity and resilience
Chapter 9. Case Study: Cyberthreats and Information Security Risks
• Provide examples of cyber threats and information security risks, and describe frameworks and best practices for managing c
• Describe lessons learned from the Equifax case study
"Sound Management of Risks related to Money Laundering and Financing of Terrorism" (Basel Committee on Banking
Supervision, January 2014, revised July 2020). (through p.16, para. 83)
• Explain best practices recommended by the Basel committee for the assessment, management, mitigation, and monitoring o
financing of terrorism (ML/FT) risks.
• Describe recommended practices for the acceptance, verification, and identification of customers at a bank.
• Explain practices for managing ML/FT risks in a group-wide and cross-border context.
Chapter 11. Case Study: Financial Crime and Fraud
• Describe elements of a control framework to manage financial fraud risk and money laundering risk.
• Summarize the regulatory findings and describe the lessons learned from the USAA case study.
outsourcing risk.
Chapter 13. Case Study: Third-party Risk Management
• Explain how risks related to the use of third parties can arise and describe characteristics of an effective third-party risk mana
• Describe the lessons learned from the case study involving a data breach caused by a third-party vendor employee.
Chapter 14. Case Study: Investor Protection and Compliance Risks in Investment Activities
• Summarize important regulations designed to protect investors in financial instruments, including MiFiD, MiFiD II, and Dodd-F
• Describe and provide lessons learned from the case studies involving violations of investor protection or compliance regulatio
Chapter 16. Case Study: Model Risk and Model Validation
• Define a model and describe different ways that financial institutions can become exposed to model risk.
• Describe the role of the model risk management function and explain best practices in the model risk management and valida
• Describe lessons learned from the three case studies involving model risk.
• Describe the evolution of the stress testing process and compare methodologies of historical EBA, CCAR and SCAP stress te
o Risk aggregation
• Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit exposures and m
capital for assets in the trading book.
• Compare the standardized IRB approach, the Foundation Internal Ratings-Based (IRB) approach, and the advanced IRB app
• Compare the basic indicator approach, the standardized approach, and the Advanced Measurement Approach for the calcula
under Basel II.
• Describe and calculate the stressed value-at-risk measure introduced in Basel 2.5, and calculate the market risk capital charg
• Define in the context of Basel III and calculate where appropriate:
• Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, including special rule
• Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage ratio, the l
• Provide examples of legislative and regulatory reforms that were introduced after the 2007 – 2009 financial crisis.
• Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti Goldfields, and M
• Summarize the asset-liability management process at a fractional reserve bank, including the process of liquidity transformati
• Describe the relationship between leverage and a firm’s return profile (including the leverage effect), and distinguish the impa
• Calculate the expected transactions cost and the spread risk factor for a transaction, and calculate the liquidity adjustment to

• Estimate a bank’s liquidity needs through three methods (sources and uses of funds, structure of funds, and liquidity indicato
• Describe and provide examples of liquidity options, and explain the impact of liquidity options on a bank’s liquidity position an
process.
• Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, cash flow a
• Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face in each line of
• Differentiate between various types of liquidity, including funding, operational, strategic, contingent, and restricted liquidity.
• Discuss liquidity stress test design issues such as scope, scenario development, assumptions, outputs, governance, and inte
• Assess the key components of a contingency funding plan (governance and oversight, scenarios and liquidity gap analysis, c
and escalation, data and reporting).
• Compare different methods used to determine the pricing of deposits and calculate the price of a deposit account using cost-
• Explain challenges faced by banks that offer deposit accounts, including deposit insurance, disclosures, overdraft protection,

• Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the (2007 - 2009) credit cr
• Identify the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an auctio
Settlements.
• Discuss the process of liquidity transfer pricing (LTP) and identify best practices for the governance and implementation of an
• Discuss how central bank swap agreements overcame challenges commonly associated with international lenders of last res

benchmark.
coverage.
programming.
marginal VaR, and component VaR.

Sons, 2003).
and information ratio and identify the circumstances under which the use of each measure is most relevant.
timing.
contribution.

Disrupting Finance: FinTech and Strategy in the 21st Century, Palgrave
• Credit Risk
• Market Risk
• Identify and discuss the categories of potential risks associated with the use of AI by financial firms and describe the risks tha
category
“Climate- related financial risks – measurement methodologies,” (Basel Committee on Banking Supervision Publicatio
• Describe main issues in identifying and measuring climate-related financial risks.
• Identify unique data needs inherent in the climate-related risks and describe candidate methodologies that could be used to a
• Describe current and developing methodologies for measuring climate-related financial risks employed by banks and supervi
• Compare and contrast climate-measuring methodologies utilized by banks, regulators, and third party providers.
• Identify strengths and weaknesses of the main types of measurement approaches.
• Assess gaps and challenges in designing a modelling framework to capture climate-related financial risk.
“Principles for the effective management and supervision of climate-related financial risks,” (Basel Committee on Ban
June 2022, 15 pp).
• Describe the principles for the management of climate-related financial risks related to corporate governance and internal con
• Describe the principles for the management of climate-related financial risks related to capital and liquidity adequacy and risk
• Describe the principles for the management of climate-related financial risks related to management monitoring and reporting
of credit risk and other risks, and scenario analysis.
• Describe the principles for the supervision of climate-related financial risks related to prudential regulatory and supervisory re
responsibilities, powers, and functions of supervisors.
“Annual Economic Report” (Basel Committee on Banking Supervision Publication, June 2022, pages 41-64).
• Describe how the dynamics of inflation differ between a low-inflation regime and a high-inflation regime.
• Explain the process of wage and price formation, the role inflation plays in this process, and vice versa.
• Describe the various channels through which inflation expectations manifest in financial markets and discuss the inference of
financial markets.
• Describe the operation of a central bank’s monetary policy in a low-inflation regime and evaluate indicators a central bank can
transitions to a high-inflation regime.
“The Blockchain Revolution: Decoding Digital Currencies,” David Andolfatto and Fernando M. Martin, Federal Reserve
Third Quarter 2022, pp. 149-65
• Explain how a blockchain-based cryptocurrency system works and compare cryptocurrencies to conventional money and pay
• Describe elements of a decentralized finance structure, including smart contracts, tokenized assets, decentralized autonomou
decentralized exchanges.
• Define stablecoins and assess their advantages and disadvantages, including their potential contribution to systemic risk and
• Explain the advantages, disadvantages, and potential applications of a central bank digital currency.
“The future monetary system, Annual Economic Report”, (Basel Committee on Banking Supervision Publication, June
• Identify and describe the benefits and limitations of crypto and decentralized finance (DeFi) innovations.
• Describe the role of stablecoins in DeFi ecosystems and differentiate among the types of stablecoins.
• Discuss possible advantages and disadvantages of a monetary system based on CBDCs.
• Understand the risks posed by the centralization that occurs in DeFi ecosystems and crypto exchanges (CEX).
• Outline the regulatory actions recommended by the BIS to manage risks in the crypto monetary system.
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2010 AIMS

Market Risk Measurement and Management

Credit Risk Measurement and Management

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

• Discuss major benefits of credit risk transfer.

Operational and Integrated Risk Management

See Line # 527

See Line # 947

Risk Management and Investment Management

Matches 2010 Line # 708

See Line # 795

• List differences between prime and subprime mortgages and borrowers.

UBS, “Shareholder Report on UBS’s Write-Downs,” (April 2008).

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

ng of options on the under

igger mortgage prepayme

in the pricing of mortgage-

st only) and PO (principal o

scuss considerations for

n has credit exposure.

of General Motors debt.

hods, payments to the protect

sing the credit spread.

ublished by BIS in February 2003:

erational risk and business risk to bank earnings volatility.

sk and the risks captured

proper alpha coverage.

eroskedasticity and autocorr

alternative to full position disclosure.

types of perverse behavio

flows, and political policies

can be taken to mitigate these risks.

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

Tuckman, Fixed Income Securities, 2nd Edition.

Kevin Dowd, Measuring Market Risk, 2nd Edition.

CREDIT RISK MEASUREMENT AND MANAGEMENT—Part II Exam Weight | 25%

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

de Servigny and Renault, Measuring and Managing Credit Risk.

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

OPERATIONAL AND INTEGRATED RISK MANAGEMENT—Part II Exam Weight |

Dowd, Measuring Market Risk, 2nd Edition.

nd business risk to bank earnings volatility.

RISK MANAGEMENT AND INVESTMENT MANAGEMENT—Part II Exam Weight | 15%

ull position disclosure.

Matches 2011 Reading # 64

Matches 2011 Reading # 69

CURRENT ISSUES IN FINANCIAL MARKETS—Part II Exam Weight | 10%

• List differences between prime and subprime mortgages and borrowers.

o mitigate these risks.

g of options on the underl

gger mortgage prepayments.

n the pricing of mortgage-backed securities.

t only) and PO (principal only) strips.

cuss considerations for a

has credit exposure.

of General Motors debt.

ethods, payments to the pro