FRM Part 2 Schweser Notes 2023

Description

Readings and Learning Objectives Reading 17 The Credit Decision Exam Focus Module 17.1: Credit Risk Evaluation Credit Risk Credit Risk Evaluation Components Qualitative and Quantitative Techniques Module 17.2: Credit Analysis, Quantitative Measures, and Failure vs. Insolvency Credit Analysis Comparison Quantitative Measures Failure vs. Insolvency Key Concepts LO 17.a LO 17.b LO 17.c LO 17.d LO 17.e LO 17.f LO 17.g Answer Key for Module Quizzes Reading 18 The Credit Analyst Exam Focus Credit Analyst Roles Job Description Consumer Credit Analyst Credit Modeling Analyst Corporate Credit Analyst Counterparty Credit Analyst Credit Analysts at Rating Agencies Sell-Side and Buy-Side Fixed-Income Analysts Bank Examiners and Supervisors Functional Objective Risk Management Investment Selection Rating Agency Primary Research Secondary Research Type of Entity Analyzed Corporate Credit Analyst Bank and Financial Institution Credit Analyst Sovereign/Municipal Credit Analyst Classification By Employer Banks, Nonbank Financial Institutions, and Institutional Investors Rating Agencies Government Agencies Rating Advisor Module 18.1: Banking Credit Analysts Banking Credit Analyst Tasks Banking Credit Analyst Skills Information Sources Annual Report Auditor’s Report Financial Statements—Annual and Interim Bank’s Website News, the Internet, Securities Pricing Data Prospectuses and Regulatory Filings Rating Agency Reports and Other Third-Party Research The CAMEL System Key Concepts LO 18.a LO 18.b LO 18.c Answer Key for Module Quizzes Reading 19 Capital Structure in Banks Exam Focus Module 19.1: Expected and Unexpected Loss Credit Risk Factors Expected Loss Unexpected Loss Portfolio Expected and Unexpected Loss Diversifiable and Undiversifiable Risk The Effect of Correlation Module 19.2: Economic Capital for Credit Risk Modeling Credit Risk Key Concepts LO 19.a LO 19.b LO 19.c LO 19.d LO 19.e LO 19.f LO 19.g LO 19.h LO 19.i Answer Key for Module Quizzes Reading 20 Rating Assignment Methodologies Exam Focus Module 20.1: Rating Systems Experts-Based, Statistical-Based, and Numerical Approaches Rating Migration Matrix Rating Agencies’ Methodologies Borrower Rating and Probability of Default Agencies’ Ratings vs. Experts-Based Approaches Module 20.2: Structural and Reduced Form Approaches The Merton Model Linear Discriminant Analysis Module 20.3: Logistic Regression Models, Cluster Analysis, and Principal Component Analysis Logistic Regression Models Cluster Analysis and Principal Component Analysis Module 20.4: Cash Flow Simulation Model, Heuristic and Numerical Approaches, and Applying Qualitative Information Cash Flow Simulation Model Heuristic Approaches vs. Numerical Approaches Applying Qualitative Information Key Concepts LO 20.a LO 20.b LO 20.c LO 20.d LO 20.e LO 20.f LO 20.g LO 20.h LO 20.i LO 20.j LO 20.k LO 20.l LO 20.m LO 20.n Answer Key for Module Quizzes Reading 21 Credit Risks and Credit Derivatives Exam Focus Module 21.1: The Merton Model The Value of Equity at Time t The Value of Debt at Time t Module 21.2: Credit Spreads, Time to Maturity, Interest Rates, and Subordinated Debt Credit Spreads, Time to Maturity, and Interest Rates Determining Firm Value and Volatility Subordinated Debt Interest Rate Dynamics Application Difficulties Using the Merton Model to Calculate PD and LGD Module 21.3: Credit Risk Portfolio Models CreditRisk+ CreditMetrics Moody’s KMV Portfolio Manager CreditPortfolioView Limitations of the Credit Portfolio Models Module 21.4: Credit Derivatives Derivatives With Credit Risks Key Concepts LO 21.a LO 21.b LO 21.c LO 21.d LO 21.e LO 21.f LO 21.g LO 21.h Answer Key for Module Quizzes Reading 22 Spread Risk and Default Intensity Models Exam Focus Module 22.1: Spread Risk Spread Conventions Spread ‘01 Binomial Distribution Exponential Distribution Module 22.2: Hazard Rates Risk-Neutral Hazard Rates Module 22.3: CDS Estimates of Hazard Rates Hazard Rate Curves Spread Risk Key Concepts LO 22.a LO 22.b LO 22.c LO 22.d LO 22.e LO 22.f LO 22.g LO 22.h LO 22.i LO 22.j LO 22.k LO 22.l LO 22.m Answer Key for Module Quizzes Reading 23 Portfolio Credit Risk Exam Focus Module 23.1: Credit Portfolios and Credit VaR Default Correlation for Credit Portfolios Credit Portfolio Framework Credit VaR Module 23.2: Conditional Default Probabilities and Credit VaR With Copulas Conditional Default Probabilities Conditional Default Distribution Variance Credit VaR With a Single-Factor Model Credit VaR With Simulation Key Concepts LO 23.a LO 23.b LO 23.c LO 23.d LO 23.e LO 23.f LO 23.g Answer Key for Module Quizzes Reading 24 Structured Credit Risk Exam Focus Module 24.1: Structured Products Types of Structured Products Capital Structure in Securitization Waterfall Structure Module 24.2: Securitization Securitization Participants Three-Tiered Securitization Structure Module 24.3: Simulation, Probability of Default, and Default Correlation, Default Sensitivities, and Structured Products Simulation Approach Impact of Probability of Default and Default Correlation Measuring Default Sensitivities Risks for Structured Products Implied Correlation Motivations for Using Structured Products Key Concepts LO 24.a LO 24.b LO 24.c LO 24.d LO 24.e LO 24.f LO 24.g LO 24.h LO 24.i LO 24.j LO 24.k LO 24.l Answer Key for Module Quizzes Reading 25 Counterparty Risk and Beyond Exam Focus Module 25.1: Counterparty Risk Counterparty Risk and Lending Risk Transactions With Counterparty Risk Institutions That Take on Counterparty Risk Counterparty Risk Terminology Module 25.2: Managing, Mitigating, and Quantifying Counterparty Risk Managing Counterparty Risk Mitigating Counterparty Risk Quantifying Counterparty Risk OTC Derivative Costs X-Value Adjustment (xVA) Terms Key Concepts LO 25.a LO 25.b LO 25.c LO 25.d LO 25.e LO 25.f LO 25.g LO 25.h Answer Key for Module Quizzes Reading 26 Netting, Close-Out and Related Aspects Exam Focus Module 26.1: Mitigating Counterparty Risk and Credit Exposure ISDA Master Agreement Netting and Close-Out Procedures Netting and Close-Out Between Two Counterparties Netting and Close-Out Between Multiple Counterparties Netting Effectiveness Termination Features Key Concepts LO 26.a LO 26.b LO 26.c LO 26.d LO 26.e LO 26.f Answer Key for Module Quiz Reading 27 Margin (Collateral) and Settlement Exam Focus Module 27.1: Collateral Collateral Management Valuation Agents Collateral Agreements and Types of Collateral Collateral Coverage, Disputes, and Resolutions Module 27.2: Collateral Agreements Collateral Agreement Features CSA Agreements CSA Calculations Collateral Agreement Risks Market Risk Operational Risk Liquidity and Liquidation Risk Funding Liquidity Risk Default Risk Foreign Exchange Risk Regulatory Requirements Key Concepts LO 27.a LO 27.b LO 27.c LO 27.d LO 27.e LO 27.f LO 27.g LO 27.h LO 27.i LO 27.j LO 27.k Answer Key for Module Quizzes Reading 28 Future Value and Exposure Exam Focus Module 28.1: Credit Exposure Credit Exposure Metrics Comparing Credit Exposure to VaR Methods Credit Exposure Factors Module 28.2: Security Exposure Profiles Modeling Netting Agreements Module 28.3: Collateral and Credit Exposure Measuring Exposure During the MPoR Modeling Collateral Differences Between Funding and Credit Exposure Impact of Collateral on Counterparty Risk and Funding Key Concepts LO 28.a LO 28.b LO 28.c LO 28.d LO 28.e LO 28.f LO 28.g LO 28.h LO 28.i Answer Key for Module Quizzes Reading 29 CVA Exam Focus Module 29.1: Credit Value Adjustment CVA Spread Impact of Changes in Credit Spread and Recovery Rates Incorporating Netting and Collateralization Module 29.2: Incremental and Marginal CVA, and CVA for a Bilateral Contract Incremental and Marginal CVA Converting CVA Into a Running Spread Applying CVA to Exotic Products and Path Dependency CVA for a Bilateral Contract BCVA Spread Module 29.3: Wrong-Way Risk Examples of Wrong-Way Risk and Right-Way Risk Over-the-Counter Put Option Over-the-Counter Call Option Credit Default Swaps (CDSs) Foreign Currency Transactions Foreign Currency Swaps Interest Rate Transactions Commodities WWR Modeling Impact of Collateral and CCPs on WWR Key Concepts LO 29.a LO 29.b LO 29.c LO 29.d LO 29.e LO 29.f LO 29.g LO 29.h and LO 29.i LO 29.j LO 29.k LO 29.l LO 29.m LO 29.n LO 29.o and LO 29.q LO 29.p Answer Key for Module Quizzes Reading 30 The Evolution of Stress Testing Counterparty Exposures Exam Focus Module 30.1: Counterparty Credit Risk Counterparty Credit Risk Exposure Measures CCR Treatment Module 30.2: Stress Testing Stress Testing Current Exposure Stress Testing Expected Loss Loan Portfolios Derivatives Portfolios Stress Testing Credit Valuation Adjustment Stress Testing Debt Value Adjustment Shortcomings of Stress Testing CCR Key Concepts LO 30.a LO 30.b LO 30.c LO 30.d LO 30.e LO 30.f LO 30.g LO 30.h Answer Key for Module Quizzes Reading 31 Credit Scoring and Retail Credit Risk Management Exam Focus Module 31.1: Credit Risk Retail Banking Risks Retail Credit Risk vs. Corporate Credit Risk The Dark Side of Retail Credit Risk Credit Risk Scoring Models Module 31.2: Creditworthiness Mortgage Credit Assessment Cutoff Scores Scorecard Performance Tradeoff Between Creditworthiness and Profitability Risk-Based Pricing Key Concepts LO 31.a LO 31.b LO 31.c LO 31.d LO 31.e LO 31.f LO 31.g LO 31.h Answer Key for Module Quizzes Reading 32 The Credit Transfer Markets—And Their Implications Exam Focus Module 32.1: Securitization and Credit Risk Mitigation Flaws in the Securitization of Subprime Mortgages Credit Risk Mitigation Techniques The Originate-to-Distribute Model of Credit Risk Module 32.2: Credit Derivatives Credit Default Swaps First-to-Default Puts Total Return Swaps Asset-Backed Credit-Linked Notes The Credit Risk Securitization Process Synthetic CDOs and Single-Tranche CDOs Covered Bonds and Funding CLOs Key Concepts LO 32.a LO 32.b LO 32.c LO 32.d LO 32.e Answer Key for Module Quizzes Reading 33 An Introduction to Securitization Exam Focus Module 33.1: Securitization Process Module 33.2: Cash Waterfall, SPV Structures, Securitization Benefits, Credit Enhancements, and Performance Analysis Tools Cash Waterfall Process SPV Structures Securitization Benefits Benefits to Financial Institutions Benefits to Investors Credit Enhancements Performance Measures for Securitized Structures Auto Loan Performance Tools Credit Card Performance Tools Module 33.3: Securitized Structure Ratios MBS Performance Tools Module 33.4: Prepayment Forecasting Key Concepts LO 33.a LO 33.b LO 33.c LO 33.d LO 33.e LO 33.f LO 33.g LO 33.h Answer Key for Module Quizzes Reading 34 Understanding the Securitization of Subprime Mortgage Credit Exam Focus Module 34.1: Subprime Mortgage Securitization The Subprime Securitization Process Frictions in Subprime Mortgage Securitization Predatory Lending and Borrowing Module 34.2: Subprime Mortgage Features and Ratings Subprime MBS Features The Subprime Credit Rating Process Key Concepts LO 34.a LO 34.b LO 34.c LO 34.d LO 36.e LO 36.f Answer Key for Module Quizzes Formulas Reading 17 Reading 19 Reading 20 Reading 21 Reading 22 Reading 23 Reading 28 Reading 29 Reading 30 Reading 33 Appendix Using the Cumulative Z-Table Probability Example Hypothesis Testing—One-Tailed Test Example Hypothesis Testing—Two-Tailed Test Example Cumulative Z-Table Index