FRM Part 2 Schweser Notes 2023

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Welcome to the 2023 SchweserNotes™ SchweserNotes™ Practice Questions Mock Exams OnDemand Class Late-Season Review Part II Exam Weightings How to Succeed Readings and Learning Objectives Reading 1 Estimating Market Risk Measures: An Introduction and Overview Exam Focus Estimating Returns Module 1.1: Historical and Parametric Estimation Approaches Historical Simulation Approach Parametric Estimation Approaches Normal VaR Lognormal VaR Module 1.2: Risk Measures Expected Shortfall Estimating Coherent Risk Measures Quantile-Quantile Plots Key Concepts LO 1.a LO 1.b LO 1.c LO 1.d LO 1.e LO 1.f Answer Key for Module Quizzes Reading 2 Non-Parametric Approaches Exam Focus Module 2.1: Non-Parametric Approaches Bootstrap Historical Simulation Approach Applying Non-Parametric Estimation Weighted Historical Simulation Approaches Age-Weighted Historical Simulation Volatility-Weighted Historical Simulation Correlation-Weighted Historical Simulation Filtered Historical Simulation Advantages and Disadvantages of Non-Parametric Methods Key Concepts LO 2.a LO 2.b LO 2.c LO 2.d Answer Key for Module Quiz Reading 3 Parametric Approaches (II): Extreme Value Exam Focus Module 3.1: Extreme Values Managing Extreme Values Extreme Value Theory Peaks-Over-Threshold Generalized Pareto Distribution VaR and Expected Shortfall Generalized Extreme Value and Peaks-Over-Threshold Multivariate EVT Key Concepts LO 3.a LO 3.b LO 3.c LO 3.d LO 3.e LO 3.f Answer Key for Module Quiz Reading 4 Backtesting VaR Exam Focus Module 4.1: Backtesting VaR Models Using Failure Rates in Model Verification Type I and Type II Errors Unconditional Coverage Using VaR to Measure Potential Losses Module 4.2: Conditional Coverage and the Basel Rules Conditional Coverage Basel Committee Rules for Backtesting Key Concepts LO 4.a LO 4.b LO 4.c LO 4.d LO 4.e LO 4.f Answer Key for Module Quizzes Reading 5 VaR Mapping Exam Focus Module 5.1: VaR Mapping Module 5.2: Mapping Fixed-Income Securities Module 5.3: Stress Testing, Performance Benchmarks, and Mapping Derivatives Stress Testing Benchmarking a Portfolio Mapping Approaches for Linear Derivatives Forward Contracts Forward Rate Agreements (FRA) Interest Rate Swaps Mapping Approaches for Nonlinear Derivatives Key Concepts LO 5.a LO 5.b LO 5.c LO 5.d LO 5.e LO 5.f LO 5.g Answer Key for Module Quizzes Reading 6 Messages From the Academic Literature on Risk Measurement for the Trading Book Exam Focus Module 6.1: Risk Measurement for the Trading Book Value at Risk (VaR) Implementation Integrating Liquidity Risk Into VaR Models Risk Measures Stress Testing Integrated Risk Measurement Risk Aggregation Balance Sheet Management Key Concepts LO 6.a LO 6.b LO 6.c LO 6.d LO 6.e LO 6.f Answer Key for Module Quiz Reading 7 Correlation Basics: Definitions, Applications, and Terminology Exam Focus Module 7.1: Financial Correlation Risk Correlations in Financial Investments Correlation in Trading With Multi-Asset Options Quanto Option Module 7.2: Correlation Swaps, Risk Management, and the Global Financial Crisis Correlation Swap Risk Management Correlations During the Global Financial Crisis Module 7.3: The Role of Correlation Risk in Other Types of Risk Key Concepts LO 7.a LO 7.b LO 7.c LO 7.d LO 7.e LO 7.f Answer Key for Module Quizzes Reading 8 Empirical Properties of Correlation: How Do Correlations Behave in the Real World? Exam Focus Module 8.1: Empirical Properties of Correlation Correlations During Different Economic States Mean Reversion and Autocorrelation Best-Fit Distributions for Correlations Key Concepts LO 8.a LO 8.b LO 8.c Answer Key for Module Quiz Reading 9 Financial Correlation Modeling—Bottom-Up Approaches Exam Focus Module 9.1: Financial Correlation Modeling Copula Functions Gaussian Copula Correlated Default Time Key Concepts LO 9.a LO 9.b LO 9.c Answer Key for Module Quiz Reading 10 Empirical Approaches to Risk Metrics and Hedging Exam Focus Module 10.1: Empirical Approaches to Risk Metrics and Hedging DV01-Neutral Hedge Regression Hedge Hedge Adjustment Factor Two-Variable Regression Hedge Level and Change Regressions Principal Components Analysis Key Concepts LO 10.a LO 10.b LO 10.c LO 10.d LO 10.e LO 10.f LO 10.g Answer Key for Module Quiz Reading 11 The Science of Term Structure Models Exam Focus Module 11.1: Interest Rate Trees and Risk-Neutral Pricing Binomial Interest Rate Tree Constructing the Binomial Interest Rate Tree Valuing an Option-Free Bond With the Tree, Using Backward Induction Using the Risk-Neutral Interest Rate Tree Module 11.2: Binomial Trees Recombining and Nonrecombining Constant Maturity Treasury Swap Module 11.3: Option-Adjusted Spread Time Steps Fixed-Income Securities and Black-Scholes-Merton Bonds With Embedded Options Callable Bonds Putable Bonds Key Concepts LO 11.a LO 11.b LO 11.c LO 11.d LO 11.e LO 11.f LO 11.g LO 11.h LO 11.i LO 11.j Answer Key for Module Quizzes Reading 12 The Evolution of Short Rates and the Shape of the Term Structure Exam Focus Module 12.1: Interest Rates Interest Rate Expectations Flat Yield Curve Upward-Sloping Yield Curve Downward-Sloping Yield Curve Interest Rate Volatility Module 12.2: Convexity and Risk Premium Convexity Effect Risk Premium Key Concepts LO 12.a LO 12.b LO 12.c LO 12.d LO 12.e Answer Key for Module Quizzes Reading 13 The Art of Term Structure Models: Drift Exam Focus Module 13.1: Term Structure Models Term Structure Model With No Drift (Model I) Model 1 Effectiveness Term Structure Model With Drift (Model 2) Model 2 Effectiveness Ho-Lee Model Module 13.2: Arbitrage-Free Models Vasicek Model Vasicek Model Effectiveness Key Concepts LO 13.a LO 13.b LO 13.c LO 13.d LO 13.e LO 13.f LO 13.g LO 13.h Answer Key for Module Quizzes Reading 14 The Art of Term Structure Models: Volatility and Distribution Exam Focus Module 14.1: Time-Dependent Volatility Models Model 3 Effectiveness Module 14.2: Cox-Ingersoll-Ross (CIR) and Lognormal Models Lognormal Model With Deterministic Drift Lognormal Model With Mean Reversion Key Concepts LO 14.a LO 14.b LO 14.c LO 14.d LO 14.e LO 14.f Answer Key for Module Quizzes Reading 15 Volatility Smiles Exam Focus Module 15.1: Implied Volatility Put-Call Parity Volatility Smiles Foreign Currency Options Equity Options Module 15.2: Alternative Methods of Studying Volatility Volatility Term Structure and Volatility Surfaces The Option Greeks Price Jumps Key Concepts LO 15.a LO 15.b LO 15.c LO 15.d LO 15.e LO 15.f LO 15.g LO 15.h LO 15.i Answer Key for Module Quizzes Reading 16 Fundamental Review of the Trading Book Exam Focus Module 16.1: Fundamental Review of the Trading Book Market Risk Capital Calculation Liquidity Horizons Proposed Modifications to Basel Regulations Trading Book vs. Banking Book Backtesting Profit/Loss Attribution Credit Risk Securitizations Key Concepts LO 16.a LO 16.b LO 16.c Answer Key for Module Quiz Formulas Reading 1 Reading 2 Reading 4 Reading 5 Reading 7 Reading 8 Reading 12 Reading 13 Reading 14 Reading 15 Appendix Using the Cumulative Z-Table Probability Example Hypothesis Testing—One-Tailed Test Example Hypothesis Testing—Two-Tailed Test Example Cumulative Z-Table STUDENT’S t-DISTRIBUTION Index