Dec 26

The 2007 FRM. How to get a jump start: Intro

by David Harper, CFA, FRM, CIPM

FRM |

BusinessRace 

The Financial Risk Manager (FRM) exam is eleven months away; GARP hasn't yet issued the 2007 calendar. But already I've received inquiries from potential candidates who want to get a jump start on the 2007 FRM. It's a fine idea because, more than others, two tactics contribute to exam success:

  • Begin systematic preparations sufficiently early in the year (note: the definition of 'starting early enough' varies according to your knowledge base going-in). Systematic preparations simply means that you should allocate regular, weekly preparation time. Every year, I hear from dozens of people who try to start studying in October and, while doable, it's just not a good plan. The challenge of the FRM exam is not depth so much as breadth: the breadth of content can be intimidating. Since it's a multi-disciplinary exam, you are very unlikely to have prior exposure to all of the elements. More likely, you'll be "deep" (or over-deep) in a few areas like maybe derivatives or bank regulations but rusty in other areas like probabilities or fixed income.
  • The second tactic is to do lots (and lots) of practice questions

Study Guide and AIMs

Aside from the core readings, GARP will issue two important documents. First, GARP will publish the new Study Guide, probably in early March. The Study Guide maps core readings to each of the five Modules. Later, GARP will issue a set of Applying Instructional Materials (AIMs). These are awkwardly named and could also be called learning outcome statements (LOS). I've seen candidates neglect the AIMs but this is a mistake: they give you goals to study after. (Our notes are organized according to the AIMs). AIMs are the list of all testable concepts. Last year, GARP twice delayed the AIMS until late May.

You can see why it's not necessarily useful to begin intense studies until after you see the AIMs. However, you absolutely can start early preparations for two reasons:

  • The content churns from 10% to 30% per year (70% to 90% repeats from one year to the next)
  • Most of the testable concepts are enduring, maybe even timeless (for example, the quantitative concepts are very stable even as the readings rotate).

Five modules

Unless GARP changes the five modules, they are:

  1. Quantitative Analysis
  2. Market Risk Measurement and Management
  3. Credit Risk
  4. Operational and Integrated Risk Management
  5. Risk and Investment Management

If you really do want to embark on a head start, you might want to follow the above order. That's because the quantitative topics are most durable and the final two, Operational Risk and Investment Management. are in greater relative flux. They are likely to contain a disproportionate share of new, as-of-yet-assigned readings.

Timeless Concepts: Quant, Market & Credit

In regard to quantitative methods, the actual assigned readings are no longer state of the art and GARP may refresh them. But the concepts will be the same: volatility, correlations, probabilities, distributions, sampling and estimation theory, hypothesis testing, and linear regression. (I won't be surprised if they add something on matrix math because matrices have gradually encroached into the subsequent material yet they've never been explicitly assigned; even if they don't, we will offer a special primer of matrices).

There may be new some new content in Market and Credit risk, but 80% of the core concepts are timeliness and enduring.  On the market side, enduring are: fixed income (Tuckman could get updated), derivatives (Hull is the best; the 6th edition of his text will stay), and VaR concepts. Let's expect GARP to rely on the newest edition of Philippe Jorion's Value at Risk, 3rd Edition. On the credit side, enduring are: external credit ratings and credit derivatives.

Less Timeless, More in Flux: Operational & Investment risk

In regard to operational risk and investment risk, you probably don't want to spend too much early time here. GARP is likely to upgrade some of these readings. Operational risk is emergent and dynamic. In 2006, GARP added some terrific readings under the operational module, but ironically, they are mostly adjacent to the topic (e.g., liquidity, regulation, case studies, counter-parties, model risk). Look for a new reading(s) squarely on the topic of theoretical and practical approaches to top-down and bottom-up operational risk.

With the notable exception of Basel II. My guess is that the Basel AIMs won't change. In July 2006, BIS issued a comprehensive version of the Basel II Framework but it merely compiled everything that become available in the updated version of November 2005 - so GARP has little reason to take new directions here. Of course, you've no doubt read about the myriad implementation issues and political ambivalence surrounding Basel II (e.g., US Fed proposes to give smaller banks an option to adopt Basel IA), but the FRM deals with implementation wisely by ignoring it. The same with many of the specifics addressed by the quantitative impact studies. Aside from practical weaknesses of Basel I, the test cares about the core elements of the three pillars of the proposed Basel II. Never mind that implementation seems to be receding target. US Agencies now anticipate that the Basel II transition phase would not be completed until 2011 at the earliest.

Please stay tuned and I will post, in order of the five core modules, the core concepts that you need to know for the FRM exam.

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