Type of questions expected from "the need for Risk management"

[verma.rahul]

Hi David

Can you please suggest/give example about what kind of questions are expected from "The need for Risk management" reading of Value at risk by Philippe jorion ? The text is completely theoretical and I think that normally questions are numericals.

Rahul

 

[David Harper CFA FRM]

Hi Rahul,

I appreciate your question because GARP gave (far) too many AIMs to this introductory chapter (e.g., the AIM about volatility makes no sense b/c Joroin literally has 2 sentences about it. No I am sorry, 1 sentence!). I agree with your premise and I have a hard time imagining questions that link directly to Jorion Chapter 1. To me, it's a theoretical teaser and pointer to some other, much deeper areas of the FRM. Most question that relate to it will simply assume the material (and definitions) in Chapter 1, not ask about it. For practice, I blogged most of the end of chapter questions, see here: http://www.bionicturtle.com/wiki/Category:Jorion::Chapter_01/

I can think of maybe three "exceptions:"

1. Jorion's brief bit about leverage (http://www.bionicturtle.com/wiki/Category:Jorion::Chapter_01/). It's easy to gloss over "leverage" as we've read about it so many times, but as i mentioned in the video, he has important specific point to make about leverage: efficient on the pro side (the notional does need to be funded - this idea of funding is really at the heart of financial engineering) and "hard to measure" on the con side (this leads to the counterparty exposure, a quite advanced field, and difficulty in measuring)

2. The comparison between valuation versus risk measurement could support some interesting questions: http://www.bionicturtle.com/wiki/Jorion.01.12./
e.g., valuation -> needs to be precise, risk -> not so much; valuation ->1st moment distribution; risk -->2nd, 3rd, 4th moment concern

3. Jorion was prescient is parsing out liquidity risk *before* the crisis into a major category, most others would have slotted under market risk. Due to credit crisis, I would expect (and hope) that liquidity risk gets its due in the exam

But otherwise, i do agree with you that's its not rich for direct questions...David

 

[verma.rahul]

Thanks again for your clarification and directing me to the required wiki page.

Rahul