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Raghav Mahajan

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It is a good idea to have a helicopter-view of the exam before you begin your preparation. This should further allay your doubts as to whether or not this certification would be useful for you.

In this article, we will cover the Syllabus, Fees and Exam structure of FRM Part 1. We will also have a look at the Job opportunities after clearing Part 1, if any (You might be in for a surprise!)

SYLLABUS

Having a basic framework in mind about the overall picture of things covered in Part – 1, you should find yourself in a better place while studying the interconnected chapters as you would be able to understand how each one of them contributes to the whole. Being aware shall also keep you from questioning “What’s the use of studying this?” at various points of time during your preparation.

The part 1 exam consists of 4 subjects namely:

SubjectWeightage
Foundations of Risk Management20%
Quantitative Analysis20%
Financial Markets and Products30%
Valuation and Risk Models30%

1. Foundations of Risk Management

  • To begin with, it talks about the meaning of risk and the various types of risks that are faced by organizations in general. It also explains the various quantitative and qualitative methods of measuring and managing such risks. it familiarizes you with the way in which firms manage these risks as well as the structure followed by banks and other financial institutions to ensure proper governance is in place .
  • It also talks about the transfer of credit risks (risk that the opposite party does not meet its end of obligation in a contract) from one firm to another through the use of certain financial products called ‘credit derivatives’. You will also learn about the significance of such products in the 2007-09 global financial crisis. 
  • One of the most important portions in this subject is on the ‘Portfolio Theory’ that explains how investors who are risk-averse invest in the markets and aim at maximizing their risk adjusted returns (returns earned per unit of risk taken).
  • An important part of this subject deals with learning about the past financial disasters – what triggered them and how they can be prevented from recurring in future.
  • Lastly, it talks about the institute’s code of conduct which all the members must abide by. Although this subject is majorly theoretical in nature, the questions asked in the exam are fairly application based. You should not be surprised to come across questions in the form of case studies that require for you to have a thorough understanding of the subject.

2. Quantitative Analysis

  • This subject starts with acquainting the uninitiated with the concept of ‘Time Value of Money’ (which means that the value of $1 today is not the same as the value of $1 two years from now). Since forecasting what could happen is an important task in risk management, you will find a couple of chapters dealing with ‘probability’. 
  • As the role of a risk manager involves dealing with large amounts of past financial data, this subject also explains certain basic concepts of statistics and how these tools could be used to analyze and interpret data to make decisions about future. You will also learn about the various types of distributions that a data set may correspond to. Based on these distributions, you will then learn to test the likeliness of various hypotheses which you may come up with while making the day to day decisions in a financial institution.
  • Another group of chapters in this subject deal with the concept of regression. This helps you predict the value of one variable by looking at it as a function (or outcome) of certain other variables. For example, you might be expressing the value of the sales of a company as a result of the amount of advertisement expenditure spent by it. This technique helps build relationships between dependent variables and put them into mathematical equations. This is further used in the chapters about time-series analysis where you forecast data based on shifts in time period.
  • The subject also has a few readings that deal with forecasting of the volatility and correlations that exist between various asset classes. This is crucially important while managing the risk for a company and is explained in much detail in the fourth subject.

3. Financial Markets & Products

  • Here, first you’ll learn about various financial institutions – commercial banks, investment banks, insurance companies, hedge funds, mutual funds, et cetera.
  • Majorly, in this section, the focus is on different types of derivative products (financial products that derive their value from an underlying asset) – forwards, futures, options and swaps. All these derivatives are explained in detail along with their application in the overall risk mitigation process. The discussion on options is continued further in the fourth book.
  • The other important portion of this subject deals with the concepts relating to fixed income. Fixed income products include bonds, Mortgage Backed Securities (MBS), et cetera. These topics are also extensively explained in this book.

4. Valuation & Risk Models

  • A measure that is very frequently used by the banking industry is the VaR (Value at Risk). This subject elaborates in detail about the different ways in which it is possible to arrive at this measure. This measure could typically tell us – “There are 99% chances that the amount of losses would not go beyond $1 million in the next 1 year”. In this case, $1 million was  the VaR. 
  • It also discusses about various rating agencies, the types of ratings given and the mechanism based on which these ratings are awarded. You study risk on an overall country level based on various macroeconomic trends. Besides, there is also a discussion on credit risk – (the risk that the counter party shall not meet its end of the obligation on time) and operational risk. 
  • The most important portion here deals with the fixed income products. This is a detailed extension of the fixed income securities introduced in the previous book. This explains in detail, the relationship between the prices of fixed income products to interest rates in general. After studying this, you shall be able to value fixed income securities like bonds.
  • Finally, you will also find readings that are an extension of the options portion from the previous book. These deal with the valuation of options using mathematical models. You also learn about the various factors that go into the determination of value of options.

FEES

Considering that a candidate has already paid the one-time enrollment fee of $400, the fee to take the Part 1 exam is:

Early $425
Standard $550
Late$725
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EXAM PATTERN

  • The FRM Part 1 exam consists a total of 100 Multiple Choice Questions (MCQs) questions to be answered in a span of 4 hours. Thus, effectively, a candidate has 2.4 minutes to answer a question.
  • These questions are mixed in terms of difficulty. There might be questions that may simply require the application of a formula. However, there may also be questions that require the application of a concept learned in a real-life case.
  • More often than not, it has been observed that the chapters that are theoretical in nature invite more complex questions in the exam. It is therefore advisable to focus on the concept-clarity while studying all the chapters.
  • The pass rate for the exam is approximately 40%.

SALARIES & JOBS

Since the Part 1 curriculum is a building block for the specialized risk management syllabus in the Part 2, it is unlikely to land a job in the field of Risk Management after clearing the Part 1 exam alone. It is therefore important to clear both the exams to be fit for most risk management roles.

The questions on the FRM exam are fairly application-based, which means that a thorough understanding of the concepts is quite essential. Ultimately, the quality of preparation would be determined by the number of hours spent, more so on the focus given on practice questions.

In order to pass the FRM exam with surety, you need to have a clear preparation strategy tailored specifically for you. The following points should help you formulate yours:

Knowing your personal short-term goals

Typically, it is believed that the FRM exam requires more than 300 hours of preparation. But this number would vary person-to-person depending on the familiarity one has with the topics covered and their grasping speed. There are about 60 readings in the FRM Part 1 and 101 in the FRM Part 2 exam.

Naturally, some readings would require more time than others. For both the exams, you would want to leave the last 20 days of your preparation for revision (since the FRM syllabus is fairly vast, there is a lot of information that you must be thorough with on the day of your exam).

You can divide the total number of readings by the number of days you have left after deducting the 20 days for revision. This would give you the number of chapters that you need to do per day.

For most people, it is not possible to study 7 days a week. This is more common for those who’re writing the exam alongside their routine job. They can make a fair estimate of the number of readings they need to do per day based on the ‘true’ number of days that they can devote to studying per week.

Choice of study material

Once you have the ‘number’ of topics that you need to complete on a per-day or a per-week basis, you need to decide on the study resources that you plan on using. There are numerous resources available on the internet – but studying from too many sources would only confuse you more. The most famous preparation providers for the FRM exam include:

  •  GARP Readings – GARP readings are obviously are the most thorough resource for studying for the exam. However, because of its extensive nature and complex language used, the institute material is not preferred by most – owing to the constraints on the time available for preparation.
  •  Bionic Turtle – This is a favorite resource for many and one of the most famous preparation providers for the exam. It is believed to have the biggest question bank. The level of questions in the Bionic Turtle is a tad bit above the level of questions asked in the exam. Therefore, a complete practice of these questions would help you easily answer most questions that you would encounter in the exam.
  •  Kaplan Schweser – One of the most famous FRM preparation providers, Kaplan is widely known for the simplicity with which all the concepts are being explained in the notes. Studying from the Schweser notes would be much easier than most other sources. However, the level of questions you would come across in their question banks may not be sufficient to clear the exam with surety. The questions in the actual exams are a bit tougher.

My Take – Study the concepts from the notes given by Schweser so as to have a good grasp of the concepts. However, to increase the chances of clearing the exam, it is highly advisable to practice the questions from the question banks provided by Bionic Turtle.

Video Classes and Lectures

Depending on your personal preference, some of you may feel more comfortable to have a classroom experience when studying for the exam. There are numerous preparation providers for the FRM. You can find out the trainer that suits you the best. Some of the most popular FRM preparation providers include:

  • The WallStreet School – The Wallstreet School is an approved Prep Provider of GARP. The course covers HD Videos, Summarized notes, question banks and Mock tests. Their uniqueness lies in the fact that they also inculcate practical knowledge in the course since the trainers themselves are Risk Managers in renowned companies such as HSBC and Blackrock.
  • Kaplan – Kaplan is another approved Prep provider of GARP. It delivers the course in both Recorded and Instructor Led Live format. Their Prep course also include Multiple quizzes and tests. You can retain the access to their material if you fail in the FRM exam, till the time you clear it.
  • Wiley – Wiley gives the access to the study material till the time you clear the exam, even if it’s a repeat attempt. Apart from videos and notes, the course comes with an adaptive test planner which will help you make a blueprint of your preparation strategy. Their concepts are covered using bit sized videos which makes them easy to grasp.

How to study?

It is very important to have a comprehensive understanding of most, if not all of the readings in order to pass the exam.

A common problem while preparing is that there are a lot of topics that are interrelated. This could be a problem for those uninitiated. The key here is to not bother too much if there is a term that you come across in one of the chapters that you do not completely understand.

It is quite likely that it would be covered extensively in the subsequent chapters. You uncheck all your doubts while you’re revising, as, at that point, you will not have a problem in understanding certain portions of some chapters that are somewhat interrelated.

Another habit that will go a long way while preparing, specifically towards the time when you’re nearing the date of the exam is making your own summarized notes after you are done studying a chapter. This is essentially important as you will not find time to study each and everything again in the last 20 days that you have earmarked for revision.

Therefore, it shall help if you have kept out a few sheets that contain all the formulas and a few important concepts in your own handwriting and symbolisms (a mind map, if you will) that helps you recall that topic in the shortest span of time possible.

How to practice?

A common mistake that candidates make is leaving practice for later. The level of questions to be practiced is fairly complex and they also supplement your overall understanding of the chapter. This is because the questions are often in the form of situations wherein you may apply something that you have studied.

It is therefore recommended that the practice for one chapter is done right after studying it. In the event that the time is available, one should also try to solve the questions more than once.

GARP also releases a sample paper approximately a month before the exam. Solving this paper should give you a fair idea about the overall level of paper and the type of questions being asked in the exam.

Since the curriculum keeps experiencing changes year after year, it is possible that many questions in the past year question papers do not fall within the ambit of the syllabus relevant for you. This would be more for older years’ papers.

Bottom Line

With a majority of FRM candidates being working professionals, it becomes difficult to stick to a study-routine every day. It is however important to accomplish your short-term goals at least on a weekly basis. There can be numerous permutations as to which days of the week you could to spend in watching videos, and on which days you can study from the book and solve questions.

But the ultimate key to clear the exam lies in being consistent in reaching your short-term goals and making your own notes (in any from) so that they help you recall the chapters quickly during the last days of revision.

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The Financial Risk Manager ® (FRM) is a leading certification in the field of risk management awarded by the Global Association of Risk Professionals (GARP), USA. With ever-increasing competition in the job markets, it is all-the-more crucial for professionals to exhibit that their knowledge and skills correspond to the international standards. Earning the FRM certification helps a risk manager prove such value to his/her employer.

Scope:

The curriculum entails a specialized knowledge of risk management techniques, quantitative and qualitative skills that helps a professional to specialize in certain roles.

Typically, the work done by FRMs today include:

  • Managing Market Risk (managing losses that occur due to factors that affect the overall financial markets, e.g. change in interest rates, recession, natural calamities, etc.)
  • Managing Credit Risk (managing the risk of default or delay in the repayment of borrowed funds – this is significant primarily in the banking companies)
  • Recognizing threats to an organization and taking steps to minimize them
  • Estimating the quantum of risk being faced by a company
  • Making relevant recommendations to the management to minimize the risk

Based on a survey, only 50% of the total tasks of FRMs is spent managing the various risk.

Moreover, as the case is in most jobs, as the experience level increases, the role sees a gradual shift from performing risk managing tasks to managing people who perform such tasks.

The FRM certification helps to build certain skillsets among the professionals who take up this course. Skillsets which are common to most certified Financial Risk Managers are:

  • Research & Strategy : FRMs are known for appreciating lessons learned from the historical financial situations whilst also assessing the current fundamentals and use their quantitative and qualitative techniques to deliver forward-looking insights.
  • Trading : In the field of trading of securities, an FRM is able to look beyond the face value performance of a security or a portfolio. By penalizing securities having excessive risk exposures, an FRM can maximize the return earned per unit of risk. Given an overall risk appetite of the portfolio, the trader then can allocate the risk to more efficient alternatives, which earn a higher return per unit of risk taken.
  • Model Building & Valuation : They also exhibit an understanding of specific limitations faced by various risk models and assure to validate any model that is in use for the purpose of effective risk management.
  • Product Management : FRMs are also equipped to identify and manage risks associated with the product being offered by the company. These may include the risk of uncertainty regarding the demand for the product, productions costs overruns, loss of sales to competitors stemming from testing, production, or shipping delays. Unless managed, such risks may adversely impact the financial performance of an enterprise.
  • Portfolio Management : FRMs use a risk-aware framework when they evaluate the financial performance of a portfolio in which they make use both of their technical and strategic know-how.

Risk managers may also add value to most organizations by working in certain functions such as – Audit, Treasury, Regulatory Compliance, Accounting & Control. They could consult clients by providing them insights on their risk appetite and help them maximize their returns on a risk-adjusted basis.

Employers:

Naturally, the need for risk management would be very rare in a manufacturing company, for instance. The major demand for risk management professionals stems mostly from the banking industry (ICICI bank, J.P. Morgan, etc.), insurance industry, credit rating agencies (Moody’s, CRISIL, etc.) and certain financial institutions (organizations that deal with huge amounts of money – hedge funds, investment banks, etc.). However, companies in the energy, as well as the IT sector also deal with various types of risk and therefore have a need for a risk management function. The following snapshots include some of the companies and banks that are known for recruiting most of the FRM candidates.

  • Top Companies which recruit FRMs are ICBC, HSBC, Citigroup, KPMG, Deutsche Bank, Credit Suisse, UBS, PWC
  • Top Banks which recruit FRMs are Chinese Construction Bank, JP Morgan Chase, Wells Fargo, Bank of Americe, Banco Santader

Salaries:

The salaries for FRMs differs across countries on account of factors such as cost of living, demand for jobs, etc. Besides, the quantum of pay also varies across different job profiles at which FRMs are majorly employed.

According to the estimates, the average salary of an FRM charter-holder in India is somewhere close to INR 10,00,000 per year. However, this number varies for different job profiles and increases with the level of experience as shown below:

Meanwhile, the overall average salaries for charter-holders in the USA stands at $99,000 per year. A closer look into the specifics for various profiles and experience levels can be seen below:

According to the U.S. Bureau of Labor Statistics, “the core functions of financial managers, including risk management and cash management, are expected to be in high demand over the next decade” which shall bring about some growth in the overall salary levels for FRM charter-holders.

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