Relevance of level 1 material while preparing for level 2

[sl]

Hello David,

I cleared the FRM level 1 exam in May 2011. I plan to take level 2 this May 2012. I would like to know how much of level 1 concepts do I need to know/apply/refresh while preparing for level 2, as I am certain I have forgotten most of whatever I studied during my level 1 preparation, and given that I don't utilize the concepts at the work place, it makes it all the more challenging.

Thanks
Sundeep

 

[David Harper CFA FRM]

Hi Sundeep, It's a little tricky to say because the methodology of P2 is improving (ie., GARP doesn't have a terribly long history with P2, so in addition to content churn the method is also less seasoned). On the last round, candidates found P2 significantly qualitative. In this respect, P2 is something of a fresh view.

And many of the topics are somewhat fresh; e.g., credit derivatives might benefit from the fixed income in P1, but is also experienced freshly.

On the other hand, in my opinion GARP is also improving the natural sequencing from P1 to P2, in the sense that P2 applies the tools/theory in P1. In this sense, there is a building-upon especially with respect to (just off the top of my head):

• Hull's derivatives; e.g., P2 volatility smile and exotics depend somewhat on P1 options
• The fixed income (Tuckman) somewhat extends the sensitivities (duration, convexity)
• VaR in Jorion/Dowd gets more application
• Basel, in some respects, applies the VaR (but it otherwise fresh)

In my opinion, investment risk and current issues (T8 & T9) are somewhat independent. I think the key foundations include, at least: Hull's derivatives, Jorion's VaR and Dowd's related, Tuckman's fixed income. I hope that helps, there are probably a hundred ways to approach this interesting question... thanks, David