It is good to know the structure of exam before beginning preparation. This should further allay your doubts as to whether or not the FRM certification would be useful for you. 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.
SYLLABUS
In the Part 2 exam, the syllabus builds further on the fundamentals covered in the first part. You will specialize in risk management specifically and try to connect the learnings to real-world applications of the risk management function.
The part 2 exam consists of 6 subjects namely:
| Subject | Weightage |
| Market Risk Measurement & Management | 20% |
| Credit Risk Measurement & Management | 20% |
| Operational & Integrated Risk Management | 20% |
| Liquidity & Treasury Risk Management | 15% |
| Investment Management | 15% |
| Current Issues in Financial Markets | 10% |
Now let’s have a brief look at various components of the FRM Part 2 Syllabus –
Market Risk Measurement & Management
- Under this section, you will learn about the different methods of calculating the ‘VaR (value at risk) estimate’. To test its authenticity, you learn about back-testing which tests the accuracy of the estimate when applied to the available empirical data. In the real-world scenario, this is very useful to test the efficiency of the estimate. Since the FRM curriculum greatly focuses on the banking industry, the concerned Basel norms and their implications in making estimates have also been subsequently discussed.
- Another set of chapters discusses the ‘correlation estimate’ in detail. It includes the different types of correlations that can be calculated as well as the real-world characteristics exhibited by this estimate. We then discuss ‘Copulas’ as an alternate estimate to correlations.
- The final set of chapters focuses on interest rates. This shall build upon your knowledge from the fixed income section of the Part 1 exam. You use the binomial model to value bonds. It discusses models that determine the movement of interest rates.
Credit Risk Measurement & Management
- To begin with, this part introduces you to the credit risk industry. It talks about the meaning of ‘credit risk’, discusses several methods of its evaluation and the typical mitigants. It also acquaints you with the kind of skills that the job of a ‘credit analyst’ commands and how credit risk management is done within the banking industry.
- Next, you learn about the methodologies used by rating agencies to arrive at their ratings. You learn the ways of measuring credit risk and the models that are used to calculate the credit risk of portfolios.
- Then, it discusses the counter-party credit risk. Say you entered into a futures contract with a person ‘X’. The credit risk will arise for that person who ultimately has a negative futures position. This topic covers the collateral requirements w.r.t such risks and their pricing.
- Once you’ve gotten a hang of the majority of things, you finally learn about structured products like Collateralized Debt Obligations (CDOs), Credit Default Swaps (CDSs). Et cetera that are created with the help of a process called securitization and used to transfer and mitigate credit risk from one party to another.
Operational & Integrated Risk Management
- This section starts with explaining the importance of operational risk management and how IT infrastructure is critical to maintaining the quality of risk data. These chapters are majorly theoretical.
- You’ll learn about the calculations regarding the economic capital of an enterprise (i.e. the amount of equity that it requires to stay solvent).
- From the perspective of a banking organization, you shall also learn to compute the risk-adjusted return on capital.
- Then, you learn about liquidity risk and how it adds to the VaR estimate. You also learn its impact on the balance sheets of banking companies. Finally, you evaluate the quality of the risk measures.
- There are banks called ‘Dealer Banks’ which have been discussed under this subject. They take opposite positions in transactions. You will learn about the risks unique to such banks.
- Basel norms have been discussed in detail – the calculations regarding the VaR for Operational, Market & Credit risks and the amount of economic capital to be maintained by the banks accordingly.
Liquidity & Treasury Risk Management
- It discusses the different types of liquidity risks and their sources. You will also learn about the Warning Indicators that help prepare for such risks.
- It explains the ways of management of liquidity reserves as well as those of managing intraday liquidity. Through the process of stress testing and improved risk reporting, better estimates of liquidity risk can be calculated. It is also useful to plan contingency funds for liquidity crises. This has been discussed subsequently. You will also learn about repurchase agreements and how they could bring about counterparty credit risks and liquidity risks.
- Finally, you will learn more about the management of interest rate risks and the concerned asset-liability management. It also analyses the shortage of US Dollars in the financial crisis.
Investment Management
- Building upon the Portfolio Theory covered in the Part 1 exam, this section starts with analyzing different factors that impact the portfolio returns. You learn the impact that illiquid assets bring to the overall portfolio risk.
- The next chunk of readings is interrelated to the VaR portion covered in the 1st Book (i.e. Market Risk Measurement & Management). Portfolio performance evaluation using key ratios have also been discussed.
- Besides, you’ll learn further on hedge funds and the different strategies that they follow. You will learn how good due diligence can help avoid the fund failures that have happened in the past.
Current Issues in Financial Markets
- This final section witness a change year after year due to the underlying efforts of the FRM committee to discuss the issues and research papers that are most relevant among risk professionals at the point in time the exams are to be given. The syllabus for a given year, however (i.e. May and November) does not see any significant changes.
- As of 2020, this covers topics such as risks relevant to blockchain technologies and FinTech companies and their financial stability. It discusses the presence of Artificial Intelligence, Machine Learning, Digital money, etc. and the risks associated with them.
FEES
Considering that a candidate has already paid the one-time enrollment fee of $400, the fee to take the Part 2 exam is:
| Early | $350 |
| Standard | $475 |
| Late | $650 |
EXAM PATTERN
- In total, the Part 2 exam consists of 80 questions to be answered in a period of 4 hours. Thus, on an average, a candidate has 4 minutes to answer a question.
- Similar to Part 1, questions in Part 2 are also indirect. It is possible that there may be a set of linked questions based on a given scenario mentioned.
- The pass rate for the Part 2 exam is approximately 50% and it must be noted that the results of the Part 2 exam are not declared if the candidate has not cleared the Part 1 exam.
- While there is no set ‘pass percentage’, based on past results, it is said that answering 60 questions correctly is generally considered a safe score.
- There is no negative marking in the exam.
SALARIES AND JOBS
According to certain estimates, the average salary of an FRM charter-holder in India is somewhere close to INR 10,00,000 per year. Meanwhile, the overall average salaries for charter-holders in the USA stands at $99,000 per year. However, these numbers vary for different job profiles and increase with the level of experience.
Typically, the majority of FRMs are employed in the banking industry due to the huge transactions that they enter into and the amount of capital that they manage. However, FRM jobs are not just restricted to the banking sector. For detailed information about the job prospects after FRM, visit – FRM: Scope, Salary & Jobs.
