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!)
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:
|Foundations of Risk Management||20%|
|Financial Markets and Products||30%|
|Valuation and Risk Models||30%|
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.
Considering that a candidate has already paid the one-time enrollment fee of $400, the fee to take the Part 1 exam is:
- 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.