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a: Estimate VaR using a historical simulation approach.

b: Estimate VaR using a parametric approach for both normal and lognormal return distributions.

c: Estimate the expected shortfall given profit and loss (P/L) or return data.

d: Describe coherent risk measures.
e: Estimate risk measures by estimating quantiles.

f: Evaluate estimators of risk measures by estimating their standard errors.

g: Interpret quantile-quantile (QQ) plots to identify the characteristics of a distribution.

a: Apply the bootstrap historical simulation approach to estimate coherent risk measures.

b: Describe historical simulation using non-parametric density estimation.

c: Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered historical simulation approaches.

d: Identify advantages and disadvantages of non-parametric estimation methods.

a: Explain the importance and challenges of extreme values in risk management.

b: Describe Extreme Value Theory (EVT) and its use in risk management.

c: Describe the peaks-over-threshold (POT) approach.

d: Compare and contrast the generalized extreme value and POT approaches to estimating extreme risks.

e: Evaluate the tradeoffs involved in setting the threshold level when applying the generalized Pareto (GP) distribution.

f: Explain the multivariate EVT for risk management.

a: Describe backtesting and exceptions and explain the importance of backtesting VaR models.

b: Explain the significant diffculties in backtesting a VaR model.

c: Verify a model based on exceptions or failure rates.

d: Identify and describe Type I and Type II errors in the context of a backtesting process.

e: Explain the need to consider conditional coverage in the backtesting framework.

f: Describe the Basel rules for backtesting.

a: Explain the principles underlying VaR mapping and describe the mapping process.

b: Explain how the mapping process captures general and specific risks.

c: Differentiate among the three methods of mapping portfolios of fixed income securities.

d: Summarize how to map a fixed income portfolio into positions of standard instruments.

e: Describe how mapping of risk factors can support stress testing.

f: Explain how VaR can be computed and used relative to a performance benchmark.

g: Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.

a: Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varying volatility in VaR risk factors, and VaR backtesting.

b: Describe exogenous and endogenous liquidity risk and explain how they might be integrated into VaR models.

c: Compare VaR, ES, and other relevant risk measures.

d: Compare unified and compartmentalized risk measurement.

e: Compare the results of research on top-down and bottom-up risk aggregation methods.

f: Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management framework.

a: Describe financial correlation risk and the areas in which it appears in finance.

b: Explain how correlation contributed to the global financial crisis of 2007- 2009.

c: Describe the structure, uses, and payoffs of a correlation swap.

d: Estimate the impact of different correlations between assets in the trading book on the VaR capital charge.

e: Explain the role of correlation risk in market risk and credit risk.
f: Relate correlation risk to systemic and concentration risk.

a: Describe how equity correlations and correlation volatilities behave throughout various economic states.

b: Calculate a mean reversion rate using standard regression and calculate the corresponding autocorrelation.

c: Identify the best-fit distribution for equity, bond, and default correlations.

a: Explain the purpose of copula functions and the translation of the copula equation.

b: Describe the Gaussian copula and explain how to use it to derive the joint probability of default of two assets.

c: Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaussian copula.

a: Explain the drawbacks to using a DV01-neutral hedge for a bond position.

b: Describe a regression hedge and explain how it can improve a standard DV01-neutral hedge.

c: Calculate the regression hedge adjustment factor, beta.

d: Calculate the face value of an offsetting position needed to carry out a regression hedge.

e: Calculate the face value of multiple offsetting swap positions needed to carry out a two-variable regression hedge.

f: Compare and contrast level and change regressions.

g: Describe principal component analysis and explain how it is applied to constructing a hedging portfolio.

a: Calculate the expected discounted value of a zero-coupon security using a binomial tree.
b: Construct and apply an arbitrage argument to price a call option on a zerocoupon security using replicating portfolios.

c: Define risk-neutral pricing and apply it to option pricing.
d: Distinguish between true and risk-neutral probabilities and apply this difference to interest rate drift.

e: Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple periods.

f: Define Option-Adjusted Spread (OAS) and apply it to security pricing.

g: Describe the rationale behind the use of recombining trees in option pricing.

h: Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the risk-neutral probabilities.

i: Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed-income securities.

j: Evaluate the appropriateness of the Black-Scholes-Merton model when valuing derivatives on fixed-income securities.

a: Explain the role of interest rate expectations in determining the shape of the term structure.

b: Apply a risk-neutral interest rate tree to assess the effect of volatility on the shape of the term structure.

c: Estimate the convexity effect using Jensen’s inequality.
d: Evaluate the impact of changes in maturity, yield, and volatility on the convexity of a security.

e: Calculate the price and return of a zero-coupon bond incorporating a risk premium.

a: Construct and describe the effectiveness of a short-term interest rate tree assuming normally distributed rates, both with and without drift.

b: Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed rates and no drift.

c: Describe methods for addressing the possibility of negative short-term rates in term structure models.

d: Construct a short-term rate tree under the Ho-Lee Model with time-dependent drift.

e: Describe uses and benefits of the arbitrage-free models and assess the issue of fitting models to market prices.

f: Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with mean reversion.

g: Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and half-life.

h: Describe the effectiveness of the Vasicek Model.

a: Describe the short-term rate process under a model with time-dependent volatility.

b: Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model with time-dependent volatility.

c: Assess the efficacy of time-dependent volatility models.

d: Describe the short-term rate process under the Cox-Ingersoll-Ross (CIR) and lognormal models.
e: Calculate the short-term rate change and describe the basis point volatility using the CIR and lognormal models.

f: Describe lognormal models with deterministic drift and mean reversion.

a: Define volatility smile and volatility skew.

b: Explain the implications of put-call parity on the implied volatility of call and put options.

c: Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pricing of options on the underlying asset.

d: Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volatility.
e: Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its shape.

f: Describe alternative ways of characterizing the volatility smile.

g: Describe volatility term structures and volatility surfaces and how they may be used to price options.

h: Explain the impact of the volatility smile on the calculation of an option's Greek letter risk measures.

i: Explain the impact of a single asset price jump on a volatility smile.

a: Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of the Trading Book (FRTB) and the motivations for these changes.

b: Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank can calculate its expected shortfall using the various horizons.

c: Explain the FRTB revisions to Basel regulations in the following areas:

  • Classification of positions in the trading book compared to the banking book.
  • Backtesting, profit and loss attribution, credit risk, and securitizations.

a: Define credit risk and explain how it arises using examples.

b: Explain the components of credit risk evaluation.
c: Describe, compare, and contrast various credit risk mitigants and their role in credit analysis.

d: Compare and contrast quantitative and qualitative techniques of credit risk evaluation.

e: Compare the credit analysis of consumers, corporations, financial institutions, and sovereigns.

f: Describe quantitative measurements and factors of credit risk, including probability of default, loss given default, exposure at default, expected loss, and time horizon.

g: Compare bank failure and bank insolvency.

a: Describe the quantitative, qualitative, and research skills a banking credit analyst is expected to have.

b: Assess the quality of various sources of information used by a credit analyst.

c: Explain the capital adequacy, asset quality, management, earnings, and liquidity (CAMEL) system used for evaluating the financial condition of a bank.

a: Evaluate a bank’s economic capital relative to its level of credit risk.

b: Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and loss rate.

c: Define and calculate expected loss (EL).

d: Defne and calculate unexpected loss (UL).

e: Estimate the variance of default probability assuming a binomial distribution.

f: Calculate UL for a portfolio and the UL contribution of each asset.

g: Describe how economic capital is derived.

h: Explain how the credit loss distribution is modeled.

i: Describe challenges to quantifying credit risk.

a: Explain the key features of a good rating system.

b: Describe the experts-based approaches, statistical-based models, and numerical approaches to predicting default.

c: Describe a rating migration matrix and calculate the probability of default, cumulative probability of default, marginal probability of default, and annualized default rate.

d: Describe rating agencies’ assignment methodologies for issue and issuer ratings.

e: Describe the relationship between borrower rating and probability of default.

f: Compare agencies’ ratings to internal experts-based rating systems.

g: Distinguish between the structural approaches and the reduced-form approaches to predicting default.

h: Apply the Merton model to calculate default probability and the distance to default and describe the limitations of using the Merton model.

i: Describe linear discriminant analysis (LDA), define the Z-score and its usage, and apply LDA to classify a sample of firms by credit quality.

j: Describe the application of a logistic regression model to estimate default probability.

k: Define and interpret cluster analysis and principal component analysis.

l: Describe the use of a cash flow simulation model in assigning ratings and default probabilities and explain the limitations of the model.

m: Describe the application of heuristic approaches, numeric approaches, and artificial neural networks in modeling default risk and define their strengths and weaknesses.

n: Describe the role and management of qualitative information in assessing probability of default.

a: Using the Merton model, calculate the value of a firm’s debt and equity and the volatility of firm value.

b: Explain the relationship between credit spreads, time to maturity, and interest rates and calculate credit spread.

c: Explain the differences between valuing senior and subordinated debt using a contingent claim approach.

d: Explain, from a contingent claim perspective, the impact of stochastic interest rates on the valuation of risky bonds, equity, and the risk of default.

e: Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, CreditRisk+, CreditMetrics, and the KMV model.

f: Assess the credit risks of derivatives.
g: Describe a credit derivative, credit default swap, and total return swap.

h: Explain how to account for credit risk exposure in valuing a swap.

a: Compare the different ways of representing credit spreads.
b: Compute one credit spread given others when possible.

c: Define and compute the Spread ‘01.

d: Explain how default risk for a single company can be modeled as a Bernoulli trial.

e: Explain the relationship between exponential and Poisson distributions.

f: Define the hazard rate and use it to define probability functions for default time and conditional default probabilities.
g: Calculate the unconditional default probability and the conditional default probability given the hazard rate.
h: Distinguish between cumulative and marginal default probabilities.

i: Calculate risk-neutral default rates from spreads.

j: Describe advantages of using the CDS market to estimate hazard rates.

k: Explain how a CDS spread can be used to derive a hazard rate curve.

l: Explain how the default distribution is affected by the sloping of the spread curve.

m: Define spread risk and its measurement using the mark-to-market and spread volatility.

a: Define and calculate default correlation for credit portfolios.

b: Identify drawbacks in using the correlation-based credit portfolio framework.

c: Assess the impact of correlation on a credit portfolio and its Credit VaR.

d: Describe the use of the single-factor model to measure portfolio credit risk, including the impact of correlation.

e: Define and calculate Credit VaR.

f: Describe how Credit VaR can be calculated using a simulation of joint defaults.
g: Assess the effect of granularity on Credit VaR.

a: Describe common types of structured products.

b: Describe tranching and the distribution of credit losses in a securitization.

c: Describe a waterfall structure in a securitization.

d: Identify the key participants in the securitization process and describe conficts of interest that can arise in the process.

e: Compute and evaluate one or two iterations of interim cashflows in a threetiered securitization structure.

f: Describe a simulation approach to calculating credit losses for different tranches in a securitization.

g: Explain how the default probabilities and default correlations affect the credit risk in a securitization.

h: Explain how default sensitivities for tranches are measured.

i: Describe risk factors that impact structured products.

j: Define implied correlation and describe how it can be measured.

k: Identify the motivations for using structured credit products.

a: Describe counterparty risk and differentiate it from lending risk.

b: Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each transaction.

c: Identify and describe institutions that take on significant counterparty risk.

d: Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default, and the recovery rate.

e: Describe credit value adjustment (CVA) and compare the use of CVA and credit limits in evaluating and mitigating counterparty risk.

f: Identify and describe the different ways institutions can quantify, manage, and mitigate counterparty risk.

g: Identify and explain the costs of an OTC derivative.

h: Explain the components of the X-Value Adjustment (xVA) term.

a: Explain the purpose of an International Swaps and Derivatives Association (ISDA) master agreement.

b: Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describe how they fit into the framework of the ISDA master agreement.

c: Describe the effectiveness of netting in reducing credit exposure under various scenarios.

d: Describe the mechanics of termination provisions and trade compressions and explain their advantages and disadvantages.

e: Identify and describe termination events and discuss their potential effects on parties to a transaction.

a: Describe the rationale for collateral management.

b: Describe the terms of a collateral agreement and features of a credit support annex (CSA) within the ISDA Master Agreement including threshold, initial margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.

c: Describe the role of a valuation agent.

d: Describe the mechanics of collateral and the types of collateral that are typically used.

e: Explain the process for the reconciliation of collateral disputes.

f: Explain the features of a collateralization agreement.

g: Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to credit quality.

h: Explain aspects of collateral including funding, rehypothecation, and segregation.

i: Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.

j: Describe the various regulatory capital requirements.

a: Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective expected positive exposure, and maximum exposure.

b: Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determination of credit exposure.

c: Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure.

d: Identify typical credit exposure profiles for various derivative contracts and combination profiles.

e: Explain how payment frequencies and exercise dates affect the exposure profile of various securities.

f: Explain the general impact of aggregation on exposure, and the impact of aggregation on exposure when there is correlation between transaction values.

g: Describe the differences between funding exposure and credit exposure.

h: Explain the impact of collateralization on exposure and assess the risk associated with the remargining period, threshold, and minimum transfer amount.

i: Assess the impact of collateral on counterparty risk and funding, with and without segregation or rehypothecation.

a: Explain the motivation for and the challenges of pricing counterparty risk.

b: Describe credit value adjustment (CVA).

c: Calculate CVA and CVA as a spread with no wrong-way risk, netting, or collateralization.

d: Evaluate the impact of changes in the credit spread and recovery rate assumptions on CVA.

e: Explain how netting can be incorporated into the CVA calculation.

f: Define and calculate incremental CVA and marginal CVA and explain how to convert CVA into a running spread.

g: Explain the impact of incorporating collateralization into the CVA calculation, including the impact of margin period of risk, thresholds, and initial margins.

h: Describe debt value adjustment (DVA) and bilateral CVA (BCVA).

i: Calculate DVA, BCVA, and BCVA as a spread.

j: Describe wrong-way risk and contrast it with right-way risk.

k: Identify examples of wrong-way risk and examples of right-way risk.

l: Discuss the impact of collateral on wrong-way risk.

m: Identify examples of wrong-way collateral.

n: Discuss the impact of wrong-way risk on central counterparties(CCPs).

o: Describe the various wrong-way modeling methods including hazard rate approaches, structural approaches, parametric approaches, and jump approaches.

p: Explain the implications of central clearing on wrong-way risk.

a: Differentiate among current exposure, peak exposure, expected exposure, and expected positive exposure.

b: Explain the treatment of counterparty credit risk (CCR) both as a credit risk and as a market risk and describe its implications for trading activities and risk management for a financial institution.

c: Describe a stress test that can be performed on a loan portfolio, and on a derivative portfolio.

d: Calculate the stressed expected loss, the stress loss for the loan portfolio, and the stress loss on a derivative portfolio.

e: Describe a stress test that can be performed on CVA.

f: Calculate the stressed CVA and the stress loss on CVA.

g: Calculate the DVA and explain how stressing DVA enters into aggregating stress tests of CCR.

h: Describe the common pitfalls in stress testing CCR.

a: Analyze the credit risks and other risks generated by retail banking.

b: Explain the differences between retail credit risk and corporate credit risk.

c: Discuss the “dark side” of retail credit risk and the measures that attempt to address the problem.

d: Define and describe credit risk scoring model types, key variables, and applications.

e: Discuss the key variables in a mortgage credit assessment and describe the use of cutoff scores, default rates, and loss rates in a credit scoring model.

f: Discuss the measurement and monitoring of a scorecard performance including the use of cumulative accuracy profile (CAP) and the accuracy ratio techniques.

g: Describe the customer relationship cycle and discuss the trade off between creditworthiness and profitability.

h: Discuss the benefits of risk-based pricing of financial services.

a: Discuss the flaws in the securitization of subprime mortgages prior to the financial crisis of 2007–2009.

b: Identify and explain the different techniques used to mitigate credit risk and describe how some of these techniques are changing the bank credit function.

c: Describe the originate-to-distribute model of credit risk transfer and discuss the two ways of managing a bank credit portfolio.

d: Describe covered bonds, funding collateralized loan obligations (CLOs), and other securitization instruments for funding purposes.

e: Describe the different types and structures of credit derivatives including credit default swaps (CDS), first-to-default puts, total return swaps (TRS), assetbacked credit-linked notes (CLN), and their applications.

a: Define securitization, describe the securitization process, and explain the role of participants in the process.

b: Explain the terms over-collateralization, first-loss piece, equity piece, and cash waterfall within the securitization process.

c: Analyze the differences in the mechanics of issuing securitized products using a trust versus a special purpose vehicle (SPV) and distinguish between the three main SPV structures: amortizing, revolving, and master trust.

d: Explain the reasons for and the benefits of undertaking securitization.

e: Describe and assess the various types of credit enhancements.

f: Explain the various performance analysis tools for securitized structures and identify the asset classes they are most applicable to.

g: Define and calculate the delinquency ratio, default ratio, monthly payment rate (MPR), debt service coverage ratio (DSCR), the weighted average coupon (WAC), the weighted average maturity (WAM), and the weighted average life (WAL) for relevant securitized structures.

h: Explain the prepayment forecasting methodologies and calculate the constant prepayment rate (CPR) and the Public Securities Association (PSA) rate.

a: Explain the subprime mortgage credit securitization process in the United States.

b: Identify and describe key frictions in subprime mortgage securitization and assess the relative contribution of each factor to the subprime mortgage problems.

c: Compare predatory lending and borrowing.

a: Describe the three lines of defense in the Basel model for operational risk governance.

b: Summarize the fundamental principles of operational risk management as suggested by the Basel committee.

c: Explain guidelines for strong governance of operational risk and evaluate the role of the board of directors, senior management, and supervisors in implementing an effective operational risk framework.

d: Describe tools and processes that can be used to identify and assess operational risk.

e: Describe features of an effective control environment and identify specific controls that should be in place to address operational risk.

f: Explain the Basel Committee’s suggestions for managing technology risk and outsourcing risk.

a: Define enterprise risk management (ERM) and explain how implementing ERM practices and policies can create shareholder value, both at the macro and the micro level.

b: Explain how a company can determine its optimal amount of risk through the use of credit rating targets.

c: Describe the development and implementation of an ERM system, as well as challenges to the implementation of an ERM system.

d: Describe the role of and issues with correlation in risk aggregation and describe typical properties of a firm’s market risk, credit risk, and operational risk distributions.

e: Distinguish between regulatory and economic capital and explain the use of economic capital in the corporate decision-making process.

a: Describe Enterprise Risk Management (ERM) and compare and contrast differing definitions of ERM.

b: Compare the benefits and costs of ERM and describe the motivations for a firm to adopt an ERM initiative.

c: Describe the role and responsibilities of a chief risk officer (CRO) and assess how the CRO should interact with other senior management.

d: Describe the key components of an ERM program.

a: Describe best practices for the implementation and communication of a risk appetite framework (RAF) at a firm.

b: Explain key challenges to the implementation of an RAF and describe how a firm can overcome each challenge.

c: Assess the role of stress testing within an RAF and describe challenges in aggregating firm-wide risk exposures.

d: Explain lessons learned in the implementation of an RAF through the presented case studies.

a: Describe challenges faced by banks with respect to conduct and culture and explain motivations for banks to improve their conduct and culture.

b: Explain methods by which a bank can improve its corporate culture and assess the progress made by banks in this area.

c: Assess the role of regulators in encouraging strong conduct and culture at banks, and provide examples of regulatory initiatives in this area.

d: Describe best practices and lessons learned in managing a bank’s corporate culture.

a: Compare risk culture and corporate culture and explain how they interact.

b: Explain factors that influence a firm’s corporate culture and its risk culture.

c: Describe methods by which corporate culture and risk culture can be measured.

d: Describe characteristics of a strong risk culture and challenges to the implementation of an effective risk culture.

e: Assess the relationship between risk culture and business performance.

a: Describe the seven Basel II event risk categories and identify examples of operational risk events in each category.

b: Summarize the process of collecting and reporting internal operational loss data, including the selection of thresholds, the timeframe for recoveries, and reporting expected operational losses.

c: Explain the use of a risk control self-assessment (RCSA) and key risk indicators (KRIs) in identifying, controlling, and assessing operational risk exposures.

d: Describe and assess the use of scenario analysis in managing operational risk and identify the biases and challenges that can arise when using scenario analysis.

e: Compare the typical operational risk profiles of firms in different financial sectors.

f: Explain the role of operational risk governance and how a firm’s organizational structure can impact risk governance.

a: Describe model risk and explain how it can arise in the implementation of a model.

b: Describe elements of an effective model risk management process.

c: Explain best practices for the development and implementation of models.

d: Describe elements of a strong model validation process and challenges to an effective validation process.

a: Identify the most common issues that result in data errors.

b: Explain how a firm can set expectations for its data quality and describe some key dimensions of data quality used in this process.

c: Describe the operational data governance process, including the use of scorecards in managing information risk.

a: Explain the process of model validation and describe best practices for the roles of internal organizational units in the validation process.

b: Compare qualitative and quantitative processes for validating internal ratings and describe elements of each process.

c: Describe challenges related to data quality and explain steps that can be taken to validate a model’s data quality.

d: Explain how to validate the calibration and the discriminatory power of a rating model.

a: Describe ways that errors can be introduced into models.

b: Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors to portfolio positions.

c: Identify reasons for the failure of the long-equity tranche, short-mezzanine credit trade in 2005 and describe how such modeling errors could have been avoided.

a: Define, compare, and contrast risk capital, economic capital, and regulatory capital, and explain methods and motivations for using economic capital approaches to allocate risk capital.

b: Describe the risk-adjusted return on capital (RAROC) methodology and its use in capital budgeting.

c: Compute and interpret the RAROC for a project, loan, or loan portfolio and use RAROC to compare business unit performance.

d: Explain challenges that arise when using RAROC for performance measurement, including choosing a time horizon, measuring default probability, and choosing a confidence level.

e: Calculate the hurdle rate and apply this rate in making business decisions using RAROC.

f: Compute the adjusted RAROC for a project to determine its viability.

g: Explain challenges in modeling diversification benefits, including aggregating a firm’s risk capital and allocating economic capital to different business lines.

h: Explain best practices in implementing an approach that uses RAROC to allocate economic capital.

a: Within the economic capital implementation framework, describe the
challenges that appear in:

  • Defining and calculating risk measures
  • Risk aggregation
  • Validation of models
  • Dependency modeling in credit risk
  • Evaluating counterparty credit risk
  • Assessing interest rate risk in the banking book

b: Describe the recommendations by the Bank of International Settlements (BIS) that supervisors should consider making effective use of internal risk measures, such as economic capital, that are not designed for regulatory purposes.

c: Explain benefits and impacts of using an economic capital framework within
the following areas:

  • Credit portfolio management
  • Risk-based pricing
  • Customer proftability analysis
  • Management incentives

d: Describe best practices and assess key concerns for the governance of an economic capital framework.

a: Describe the Federal Reserve’s Capital Plan Rule and explain the seven principles of an effective capital adequacy process for bank holding companies (BHCs) subject to the Capital Plan Rule.

b: Describe practices that can result in a strong and effective capital adequacy process for a BHC in the following areas:

  • Risk identification
  • Internal controls, including model review and valuation
  • Corporate governance
  • Capital policy, including setting of goals and targets and contingency planning Stress testing and stress scenario design
  • Estimating losses, revenues, and expenses, including quantitative and qualitative methodologies
  • Assessing the impact of capital adequacy, including risk-weighted asset (RWA) and balance sheet projections.

a: Describe the evolution of the stress testing process and compare the methodologies of historical European Banking Association (EBA), Comprehensive Capital Analysis and Review (CCAR), and Supervisory Capital Assessment Program (SCAP) stress tests.

b: Explain challenges in designing stress test scenarios, including the problem of coherence in modeling risk factors.

c: Explain challenges in modeling a bank’s revenues, losses, and its balance sheet over a stress test horizon period.

a: Explain how risks can arise through outsourcing activities to third-party service providers and describe elements of an effective program to manage outsourcing risk.

b: Explain how financial institutions should perform due diligence on third-party service providers.

c: Describe topics and provisions that should be addressed in a contract with a third-party service provider.

a: Explain best practices recommended for the assessment, management, mitigation, and monitoring of money laundering and financial terrorism (ML/FT) risks.

a: Summarize the clearing process in OTC derivatives markets.

b: Describe changes to the regulation of OTC derivatives which took place after the 2007-2009 financial crisis and explain the impact of these changes.

a: Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and explain the reasons for revisions to Basel regulations over time.

b: Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines.

c: Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit exposures and methods for calculating market risk capital for assets in the trading book.

d: Describe changes to the Basel regulations made as part of Basel II, including the three pillars.

e: Compare the standardized internal ratings-based (IRB) approach, the foundation IRB approach, and the advanced IRB approach for the calculation of credit risk capital under Basel II.
f: Calculate credit risk capital under Basel II utilizing the IRB approach.

g: Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for the calculation of operational risk capital under Basel II.

h: Summarize elements of the Solvency II capital framework for insurance companies.

a: Describe and calculate the stressed VaR introduced in Basel 2.5 and calculate the market risk capital charge.

b: Explain the process of calculating the incremental risk capital charge for positions held in a bank’s trading book.

c: Describe the comprehensive risk (CR) capital charge for portfolios of positions that are sensitive to correlations between default risks.

d: Define in the context of Basel III and calculate where appropriate:

  • Tier 1 capital and its components
  • Tier 2 capital and its components
  • Required Tier 1 equity capital, total Tier 1 capital, and total capital

e: Describe the motivations for and calculate the capital conservation buffer and the countercyclical buffer, including special rules for globally systemically important banks (G-SIBs).

f: Describe and calculate ratios intended to improve the management of liquidity risk, including the required leverage ratio, the liquidity coverage ratio, and the net stable funding ratio.

g: Describe the mechanics of contingent convertible bonds (CoCos) and explain the motivations for banks to issue them.

h: Explain motivations for “gold plating” of regulations and provide examples of legislative and regulatory reforms that were introduced after the 2007-2009 financial crisis.

a: Explain the motivations for revising the Basel III framework and the goals and impacts of the December 2017 reforms to the Basel III framework.

b: Summarize the December 2017 revisions to the Basel III framework in the following areas:

  • The standardized approach to credit risk
  • The internal ratings-based (IRB) approaches for credit risk
  • The CVA risk framework
  • The operational risk framework
  • The leverage ratio framework

c: Describe the revised output floor introduced as part of the Basel III reforms and approaches to be used when calculating the output floor.

a: Explain the elements of the new standardized approach to measure operational risk capital, including the business indicator, internal loss multiplier, and loss component, and calculate the operational risk capital requirement for a bank using this approach.

b: Compare the Standardized Measurement Approach (SMA) to earlier methods of calculating operational risk capital, including the Advanced Measurement Approaches (AMA).

c: Describe general and specific criteria recommended by the Basel Committee for the identification, collection, and treatment of operational loss data.

a: Describe elements of an effective cyber-resilience framework and explain ways that an organization can become more cyber-resilient.

b: Explain resilient security approaches that can be used to increase a firm’s cyber resilience and describe challenges to their implementation.

c: Explain methods that can be used to assess the financial impact of a potential cyber attack and explain ways to increase a firm’s financial resilience.

a: Define cyber resilience and compare recent regulatory initiatives in the area of cyber resilience.

b: Describe current practices by banks and supervisors in the governance of a cyber-risk-management framework, including roles and responsibilities.

c: Explain methods for supervising cyber resilience, testing and incident response approaches, and cybersecurity and resilience metrics.

d: Explain and assess current practices for the sharing of cybersecurity information between different types of institutions.

e: Describe practices for the governance of risks of interconnected third-party service providers.

a: Describe an impact tolerance; explain best practices and potential benefits for establishing the impact tolerance for a business service.

b: Provide examples of important business services and explain criteria that firms should use to determine their important business services.

c: Explain tools and processes, including mapping and scenario testing, that financial institutions should use to improve their operational resilience and remain within their impact tolerance.

d: Describe the governance of an operational resilience policy, including the relationships between operational resilience and a firm’s risk appetite, impact tolerance, continuity planning, and outsourcing to third-party providers.

a: Define and describe operational resilience and explain essential elements of operational resilience.

b: Explain recommended principles that banks should follow to implement an effective operational resilience approach.

a: Describe elements of an effective operational resilience framework and its potential benefits.

a: Explain and calculate liquidity trading risk via cost of liquidation and liquidity-adjusted VaR (LVaR).

b: Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock, Ashanti Goldfields, and Metallgesellschaft.

c: Evaluate Basel III liquidity risk ratios and BIS principles for sound liquidity risk management.

d: Explain liquidity black holes and identify the causes of positive feedback trading.

a: Differentiate between sources of liquidity risk and describe specific challenges faced by different types of financial institutions in managing liquidity risk.

b: Summarize the asset-liability management process at a fractional reserve bank, including the process of liquidity transformation.

c: Compare transactions used in the collateral market and explain risks that can arise through collateral market transactions.

d: Describe the relationship between leverage and a firm’s return profile (including the leverage effect) and distinguish the impact of different types of transactions on a firm’s leverage and balance sheet.

e: Distinguish methods to measure and manage funding liquidity risk and transactions liquidity risk.

f: Calculate the expected transactions cost and the spread risk factor for a transaction and calculate the liquidity adjustment to VaR for a position to be liquidated over a number of trading days.

g: Discuss interactions between different types of liquidity risk and explain how liquidity risk events can increase systemic risk.

a: Evaluate the characteristics of sound Early Warning Indicators (EWI) measures.

b: Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve).

c: Discuss the applications of EWIs in the context of the liquidity risk management process.

a: Compare various money market and capital market instruments and discuss their advantages and disadvantages.

b: Identify and discuss various factors that affect the choice of investment securities by a bank.

c: Apply investment maturity strategies and maturity management tools based on the yield curve and duration.

a: Calculate a bank’s net liquidity position and explain factors that affect the supply and demand of liquidity at a bank.

b: Compare strategies that a bank can use to meet demands for additional liquidity.

c: Estimate a bank’s liquidity needs through three methods (sources and uses of funds, structure of funds, and liquidity indicators).

d: Summarize the process taken by a US bank to calculate its legal reserves.

e: Differentiate between factors that affect the choice among alternate sources of reserves.

a: Identify and explain the uses and sources of intraday liquidity.

b: Discuss the governance structure of intraday liquidity risk management.

c: Differentiate between methods for tracking intraday flows and monitoring risk levels.

a: Distinguish between deterministic and stochastic cash flows and provide examples of each.

b: Describe and provide examples of liquidity options and explain the impact of= liquidity options on a bank’s liquidity position and its liquidity management process.

c: Describe and apply the concepts of liquidity risk, funding cost risk, liquidity generation capacity, expected liquidity, and cash flow at risk.

d: Interpret the term structure of expected cash flows and cumulative cash flows and cumulative cash flows.

e: Discuss the impact of available asset transactions on cash flows and liquidity generation capacity.

a: Compare and contrast the major lines of business in which dealer banks operate and the risk factors they face in each line of business.

b: Identify situations that can cause a liquidity crisis at a dealer bank and explain responses that can mitigate these risks.

c: Assess policy measures that can alleviate firm-specific and systemic risks related to large dealer banks.

a: Differentiate between various types of liquidity, including funding, operational, strategic, contingent, and restricted liquidity.

b: Estimate contingent liquidity via the liquid asset buffer.

c: Discuss liquidity stress test design issues such as scope, scenario development, assumptions, outputs, governance, and integration with other risk models.

a: Identify best practices for the reporting of a bank’s liquidity position.

b: Compare and interpret different types of liquidity risk reports.

c: Explain the process of reporting a liquidity stress test and interpret a liquidity stress test report.

a: Discuss the relationship between contingency funding planning and liquidity stress testing.

b: Evaluate the key design considerations of a sound contingency funding plan.

c: Assess the key components of a contingency funding plan (governance and oversight, scenarios and liquidity gap analysis, contingent actions, monitoring and escalation, and data and reporting).

a: Differentiate between the various transaction and non-transaction deposit types.

b: Compare the different methods used to determine the pricing of deposits and calculate the price of a deposit account using cost-plus, marginal cost, and conditional pricing formulas.

c: Explain challenges faced by banks that offer deposit accounts, including deposit insurance, disclosures, overdraft protection, and basic (lifeline) banking.

a: Distinguish between the various sources of non-deposit liabilities at a bank.

b: Describe and calculate the available funds gap.

c: Discuss factors affecting the choice of non-deposit funding sources.

d: Calculate overall cost of funds using both the historical average cost approach and the pooled-funds approach.

a: Describe the mechanics of repurchase agreements (repos) and calculate the settlement for a repo transaction.

b: Discuss common motivations for entering into repos, including their use in cash management and liquidity management.

c: Discuss how counterparty risk and liquidity risk can arise through the use of repo transactions.

d: Assess the role of repo transactions in the collapses of Lehman Brothers and Bear Stearns during the 2007-2009.

e: Compare the use of general and special collateral in repo transactions.

f: Identify the characteristics of special spreads and explain the typical behavior of US Treasury special spreads over an auction cycle.

g: Calculate the Financing advantage of a bond trading special when used in a repo transaction.

a: Discuss the process of liquidity transfer pricing (LTP) and identify best practices for the governance and implementation of an LTP process.

b: Discuss challenges that may arise for banks during the implementation of LTP.

c: Compare the various approaches to liquidity transfer pricing (zero cost, average cost, and matched-maturity marginal cost).

d: Describe the contingent liquidity risk pricing process and calculate the cost of contingent liquidity risk.

a: Identify the causes of the US dollar shortage during the financial crisis of 2007-2009.

b: Evaluate the importance of assessing maturity/currency mismatch across the balance sheets of consolidated entities.

c: Discuss how central bank swap agreements overcame challenges commonly associated with international lenders of last resort.

a: Differentiate between the mechanics of foreign exchange (FX) swaps and cross-currency swaps.

b: Identify key factors that affect the cross-currency swap basis.

c: Assess the causes of covered interest rate parity violations after the financial crisis of 2007-2009.

a: Discuss how asset-liability management strategies can help a bank hedge against interest rate risk.

b: Describe interest-sensitive gap management and apply this strategy to maximize a bank’s net interest margin.

c: Describe duration gap management and apply this strategy to protect a bank’s net worth.

d: Discuss the limitations of interest-sensitive gap management and duration gap management.

a: Evaluate the characteristics of illiquid markets.

b: Examine the relationship between market imperfections and illiquidity.

c: Assess the impact of biases on reported returns for illiquid assets.

d: Explain the unsmoothing of returns and its properties.

e: Compare illiquidity risk premiums across and within asset categories.

f: Evaluate portfolio choice decisions on the inclusion of illiquid assets.

a: Provide examples of factors that impact asset prices and explain the theory of factor risk premiums.

b: Discuss the capital asset pricing model (CAPM) including its assumptions and explain how factor risk is addressed in the CAPM.

c: Explain the implications of using the CAPM to value assets, including equilibrium and optimal holdings, exposure to factor risk, its treatment of diversification benefits, and shortcomings of the CAPM.

d: Describe multifactor models and compare and contrast multifactor models to the CAPM.

e: Explain how stochastic discount factors are created and apply them in the valuation of assets.

f: Describe efficient market theory and explain how markets can be inefficient.

a: Describe the process of value investing and explain why a value premium may exist.

b: Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility, affect asset returns and risk premiums.

c: Assess methods of mitigating volatility risk in a portfolio and describe challenges that arise when managing volatility risk.

d: Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the Fama-French model as an example.

e: Compare value and momentum investment strategies, including their return and risk profiles.

a: Describe and evaluate the low-risk anomaly of asset returns.

b: Define and calculate alpha, tracking error, the information ratio, and the Sharpe ratio.

c: Explain the impact of benchmark choice on alpha and describe characteristics of an effective benchmark to measure alpha.

d: Describe Grinold’s fundamental law of active management, including its assumptions and limitations, and calculate the information ratio using this law.

e: Apply a factor regression to construct a benchmark with multiple factors, measure a portfolio’s sensitivity to those factors, and measure alpha against that benchmark.

f: Explain how to use style analysis to handle time-varying factor exposures.

g: Describe issues that arise when measuring alphas for nonlinear strategies.

h: Compare the volatility anomaly and the beta anomaly and analyze evidence of each anomaly.

i: Describe potential explanations for the risk anomaly.

a: Distinguish among the inputs to the portfolio construction process.

b: Evaluate the motivation for and the methods used for refining alphas in the implementation process.

c: Describe neutralization and the different approaches used for refining alphas to be neutral.

d: Describe the implications of transaction costs on portfolio construction.

e: Describe practical issues in portfolio construction, including the determination of an appropriate risk aversion, aversions to specific risks, and proper alpha coverage.

f: Describe portfolio revisions and rebalancing, and analyze the tradeoffs between alpha, risk, transaction costs, and time horizon.

g: Determine the optimal no-trade region for rebalancing with transaction costs.

h: Evaluate the strengths and weaknesses of the following portfolio construction techniques: screens, stratification, linear programming, and quadratic programming.

i: Describe dispersion, explain its causes, and describe methods for controlling forms of dispersion.

a: Define, calculate, and distinguish between the following portfolio VaR measures: diversified and undiversified portfolio VaR, individual VaR, incremental VaR, marginal VaR, and component VaR.

b: Explain the impact of correlation on portfolio risk.

c: Apply the concept of marginal VaR to guide decisions about portfolio VaR.
d: Explain the risk-minimizing position and the risk and return-optimizing position of a portfolio.

e: Explain the difference between risk management and portfolio management and describe how to use marginal VaR in portfolio management.

a: Define risk budgeting.

b: Describe the impact of horizon, turnover, and leverage on the risk management process in the investment management industry.

c: Describe the investment process of large investors such as pension funds.

d: Describe the risk management challenges associated with investments in hedge funds.

e: Distinguish among the following types of risk: absolute risk, relative risk, policy-mix risk, active management risk, funding risk, and sponsor risk.

f: Explain the use of VaR to check manager compliance and monitor risk.

g: Explain how VaR can be used in the development of investment guidelines and for improving the investment process.

h: Describe the risk budgeting process and calculate risk budgets across asset classes and active managers.

a: Describe the three fundamental dimensions behind risk management, and their relation to VaR and tracking error.

b: Describe risk planning, including its objectives, effects, and the participants in its development.

c: Describe risk budgeting and the role of quantitative methods in risk budgeting.

d: Describe risk monitoring and its role in an internal control environment.

e: Identify sources of risk consciousness within an organization.

f: Describe the objectives and actions of a risk management unit in an investment management firm.

g: Describe how risk monitoring can confirm that investment activities are consistent with expectations.

h: Describe the Liquidity Duration Statistic and how it can be used to measure liquidity.

i: Describe the objectives of performance measurement tools.

j: Describe the use of alpha, benchmarks, and peer groups as inputs in performance measurement tools.

a: Differentiate between the time-weighted and dollar-weighted returns of a portfolio and describe their appropriate uses.

b: Describe risk-adjusted performance measures, such as Sharpe’s measure, Treynor’s measure, Jensen’s measure (Jensen’s alpha), and the information ratio, and identify the circumstances under which the use of each measure is most relevant.

c: Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios and the graphical representation of these measures.

d: Determine the statistical significance of a performance measure using standard error and the t-statistic.

e: Describe style analysis.

f: Explain the difficulties in measuring the performance of actively managed portfolios.

g: Describe performance manipulation and the problems associated with using conventional performance measures.

h: Describe techniques to measure the market timing ability of fund managers with a regression and with a call option model and compute return due to market timing.

i: Describe and apply performance attribution procedures, including the asset allocation decision, sector and security selection decision, and the aggregate contribution.

a: Describe the characteristics of hedge funds and the hedge fund industry and compare hedge funds with mutual funds.

b: Explain biases that are commonly found in databases of hedge funds.

c: Explain the evolution of the hedge fund industry and describe landmark events that precipitated major changes in the development of the industry.

d: Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of assets under management (AUM) in the industry.

e: Explain the relationship between risk and alpha in hedge funds.

f: Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy.

g: Describe the historical portfolio construction and performance trends of hedge funds compared to those of equity indices.

h: Describe market events that resulted in a convergence of risk factors for different hedge fund strategies and explain the impact of such convergences on portfolio diversification strategies.

i: Describe the problem of risk sharing asymmetry between principals and agents in the hedge fund industry.

a: Identify reasons for the failures of hedge funds in the past.

b: Explain elements of the due diligence process used to assess investment managers.

c: Identify themes and questions investors can consider when evaluating a hedge fund manager.

d: Describe criteria that can be evaluated in assessing a hedge fund’s risk management process.

e: Explain how due diligence can be performed on a hedge fund’s operational environment.

f: Explain how a hedge fund’s business model risk and its fraud risk can be assessed.

g: Describe elements that can be included as part of a due diligence questionnaire.

a: Explain the use and efficacy of information disclosures made by investment advisors in predicting fraud.

b: Describe the barriers and the costs incurred in implementing fraud prediction methods.

c: Discuss ways to improve investors’ ability to use disclosed data to predict fraud.

a: Explain the distinctions between the two broad categories of machine learning and describe the techniques used within each category.

b: Analyze and discuss the application of AI and machine learning techniques in the following areas:

  • Credit risk
  • Market risk
  • Operational risk
  • Regulatory compliance

c: Describe the role and potential benefits of AI and machine learning techniques in risk management.

d: Identify and describe the limitations and challenges of using AI and machine learning techniques in risk management.

a: Identify and discuss the categories of potential risks associated with the use of AI by financial firms and describe the risks that are considered under each category.

b: Describe the four core components of AI governance and recommended practices related to each.

c: Explain how issues related to interpretability and discrimination can arise from the use of AI by financial firms.

d: Describe practices financial firms can adopt to mitigate AI risks.

a: Define cyber risk and describe the elements that constitute it.

b: Describe and compare causes of cyber risks and methods of enacting cyber attacks.

c: Identify and explain the effect COVID-19 has had on the level of cyber threat.

d: Assess how the financial sector in particular has been threatened by cyber risk during the pandemic.

e: Identify changes in cyber risk landscape and ways to mitigate risks to financial stability.

a: Identify the key market developments that took place during the March 2020 COVID-19 market turmoil, conditions that were prevalent, and their effects on the financial markets and its participants.

b: Describe how financial participants sought safety and the stages by which stress spread through the financial system as the pandemic unfolded.

c: Describe the origins and backdrop of the March 2020 COVID-19 market stress and the systemic weaknesses existing prior to the pandemic that contributed to systemic fragility.

d: Describe the role that non-bank financial institutions’ (NBFIs) reliance on U.S. dollar funding, and the demand for liquidity and credit risk held outside the banking sector had on the resilience of the global financial system during the pandemic.

e: Describe the impact of the pandemic and its propagation on the financial markets, including money market funds (MMFs), CCPs, margin, open-ended funds, ETFs, short-term funding markets, repos, and the government and corporate bond markets.

f: Describe the public sector policy responses to restore financial market functioning during the COVID-19 market turmoil.

g: Describe the lessons learned from the March 2020 COVID-19 market turmoil.

a: Discuss regulatory expectations on LIBOR transition and how these expectations can help market participants in their management of conduct risk arising from the transition.

b: Analyze the risks of LIBOR transition from both sell-side and buy-side perspectives and give examples of good practice observations.

a: Describe the features comprising an ideal benchmark.

b: Examine the issues that led to the replacement of LIBOR as the reference rate.

c: Examine the risks inherent in basing risk-free rates (RFRs) on transactions in the repo market.

a: Describe climate-related risk drivers and explain how those drivers give rise to different types of risks for banks.

b: Compare physical and transition risk drivers related to climate change.

c: Assess the potential impact of different microeconomic and macroeconomic drivers of climate risk.

d: Describe and assess factors that can amplify the impact of climate-related risks on banks as well as potential mitigants for these risks.

a: Describe and compare different attributes of means of payment.

b: Describe the risks faced by the banking sector as e-money adoption increases and identify means of mitigating those risks.

c: Explain reasons for and characteristics contributing to rapid global adoption of e-money.

d: Evaluate effects of different scenarios of e-money adoption on the banking sector.

e: Discuss regulatory and policy actions that could be implemented in response to risks arising from increased adoption of e-money.