Will there be questions on current happening in risk mgmt.

[varadarajan]

Hi David,

With the current Turmoil happening in the financial risk mgmt world, can we expect few questions on the current happenings around the risk aspects of the recent cases.

Or Do GARP always strict to the AIMs declared by them ?

regards

varadarajan N

 

[David Harper CFA FRM]

Hi varadarajan,

I've gotten a few questions about this. I have three thoughts about it.

1. The near-term turmoil (i.e., last few weeks) should have a material impact on the 2009 FRM but is not likely to impact the 2008 FRM. This may overstate GARP a little bit, but you are essentially correct: "GARP is always strict to the AIMs declared by them." GARP is not as strict to the AIMs as I would prefer, but the FRM, for the most part is faithful to the study guide and AIMs. And most importantly, to the assigned readings. Where they seem to vary from the assigned readings, on the exam, it seems only to be in regard to basics that were previously assigned (their variation error is backward looking on basics, not forward looking). So on this basis, the current turmoil (IMO) should not really impact your studies.

2. The longer-term turmoil (which i will define, based on Ashcraft's subprime reading, as starting near the beginning of 2007!) already does have some representation, these are now "must reads:" Ashcraft on Subprime Securitization; Andrew Lo on Quants in 2007 and Hedge Fund replication (i.e., liquidity, the rise of beta as a vehicle for the transmission of systemic risk, limitations of regulation); and, given the spotlight is on Basel II, the Basel II framework.

3. The most important thing (again, IMO, I don't have a perfect crystal ball on the exam) is that the current turmoil connects with several extant (testable) themes in the FRM. I'd offer the turmoil is "useful" to us to make concrete some of the ideas we might otherwise find abstract. These include, but are not limited to:

* Liquidity risk; e.g., Culp on liquidity-adjusted VaR. Please note both Andrew Lo reading are ripe with liquidity risk. This will be tested and I expect a bigger section next year
* Model risk (the dowd reading)
* Enterprise risk management
* Credit derivatives - not just CDS, but securitization and CDOs/tranched structures. The Culp reading on securitization is very good.
* Counterparty risk. Another topic that will surely be tested and will surely expand.
* Common factor models and beta exposure; i.e., especially as they support contagion
* As mentioned, the subprime securitization reading with its sub-themes (loss distribution)
* Credit ratings (both subprime, where Ashroft criticizes but also De Servigny)
* Basel II (of course)

Hope that helps, David