Valuation and Risk
Valuation and Risk Models，PART I EXAM WEIGHT | 30%
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This area will test a candidate’s knowledge of valuation techniques and risk
models. The broad knowledge points covered in Valuation and Risk Models include
To cover these broad knowledge points, a new proprietary book has been
created exclusively for FRM candidates.
While detailed learning objectives associated with these readings are
presented in the 2021 FRM Learning Objectives document, a brief summary of how
to relate these readings to the knowledge points follows.
The first three chapters introduce financial risk measures and models.
Chapter 1 examines measures of financial risk and describes measurement
frameworks such as the mean-variance approach, Value-at-risk (VaR), and expected
shortfall (ES). Chapter 2 covers VaR estimation approaches and applications.
Chapter 3 discusses the calculation and monitoring of volatility used in the VaR
The next three chapters introduce risk. Chapter 4 describes credit rating and
presents a review of external and internal rating methodologies, along with
their relative strengths and weaknesses. Chapter 5 explains specific sources of
country risk and the use of external ratings in assessing sovereign default
risk. Chapter 6 covers the basics of credit risk, specifically expected loss
(EL) and unexpected loss (UL), for both individual assets and portfolios, and
describes default risk models such as the Gaussian copula model, Vasicek’s
model, and CreditMetrics.
Chapter 7 introduces aspects of operational risk and discusses various
approaches for determining capital for operational risk. Stress testing, its
importance, applications, and practices are explained in chapter 8. Chapters 9
through 13 focus on risk management for fixed income securities. The first three
chapters cover the various tools of fixed income valuation, while Chapters 12
and 13 cover risk metrics and hedging.
The last three chapters discuss key elements of option pricing and option
sensitivities. Chapters 14 and 15 cover option valuation using binominal trees
and the Black-Scholes-Merton model. Chapter 16 presents applications of options
for hedging and risk management.