An approach to crack the FRM exam ( Part 1 and 2)
The Financial Risk Manager (FRM) exam is a certification in financial risk management conducted by GARP (Global Association of Risk Professionals). With the global financial crisis pointing out the ill effects of poor risk management, FRM certification’s relevance and popularity has only increased over the years. FRM has two parts and while attempting both parts together, it requires that part 1 be cleared before part 2 even gets evaluated. Taking both parts at once can be a bit taxing given that there are over 130 chapters and the exam requires you to sit for two 4-hour exams on a single day with only a 2 hour break in-between. It, then, becomes all the more important for you to understand the concepts as it is highly possible that the amount of information overload resulting from learning the formulae of both the levels can overwhelm you in the exam hall. This conceptual clarity can be achieved only through a detailed and consistent preparation of the course content. Providing clarity on how to go about preparing for both parts is what this blog aims at.
The core readings provided by GARP are very detailed and useful but is also time consuming. If you begin the preparation well in advance, you can afford to start with the core readings and then go on to other materials. If time is a constraint, the ideal method would be to start with either Schweser or Bionic Turtle (BT) study materials and referring core readings for only those chapters which, you feel, are not adequately explored or explained in Schweser/BT. Choosing between Schweser and BT is hard as there are some who believe that schweser is easy to understand and better presented while there are others who believe that BT covers the topics in an exhaustive manner. In my case, I had followed only schweser for my preparation with occasional references to core readings whenever I had doubts. BT provides very good videos that can be used as a supplement to the Schweser materials. Especially for topics in Financial Markets (book 3) and valuation models (book 4) of part 1 and Credit and market risk (book 1 and 2) of part 2, BT videos give you a very good perspective. A practice that worked for me was to begin a chapter by watching its BT video and following it up with reading Schweser materials and finally referring core readings if required.
Part 1 topics requiring special attention
The relation between both the levels is to be understood well and used to your advantage. There are certain topics in part 1 that are either revisited or continued in part 2. It will help if these topics are covered on priority as it results in mapping part 1 and part 2. Even though it is up to GARP to choose which chapter to ask more questions from, the topics from part 1 mentioned below help in your transition to part 2 and make learning easy.
Part 1 Book 1: CAPM, RAPM (Risk-Adjusted Performance Measurement) and financial disasters.
Part 1 Book 2: Regression, simulation methods and correlation estimation methods.
Part 1 Book 3: Futures/forwards/options/swaps markets and their different strategies. Derivatives on fixed income securities is another topic that is taken up in detail in part 2. John C Hull covers these topics in detail and is a must read.
Part 1 Book 4: VaR, Option valuation and fixed income valuation.
Part 2 preparation
Part 2 is content intensive than part 1 and hence requires more attention. The reason I am not mentioning any particular topic is because part 2 has too many topics and too few questions. 75 and odd topics for 80 questions means that to even try and attempt 60 questions, you need to be well versed with at least 55-60 topics. Try reading as many topics as you can.
Credit risk is the most challenging and fruitful section of all. The concepts are such that it might be hard to learn but once you learn those concepts, you can score high.
Operational risk comes next in terms of difficulty and an added concern in this section is its dullness. I never read operational risk at one stretch but used it as a break topic whenever I finished a bunch of chapters in other sections.
Market risk is one of the easiest sections of part 2 and should be seen as a scoring area. It takes considerably less time to finish and this calls for more revisions. Remember that if it is easy for you, so it is for everyone else out there. Only practice can set you apart from the less prepared ones.
Risk and Investment management is a topic might seem difficult in the beginning but continue reading. Once you sail through the initial few difficult chapters, the rest can be managed.
Current issues in financial market is the easiest of all sections and requires minimum effort. Most of the candidates start this topic only towards the end owing to its uncomplicatedness but I would recommend otherwise. This, like market risk, requires repeated study in order to shine among your peers.
Managing part 1 and 2
Give part 1 a thorough reading before beginning part 2. The course is so designed that you will start questioning your understanding of part 1 as you proceed with part 2. Instead of feeling deterred by this, get back to the relevant topics of part 1 and re-read it. These oscillations between part 1 and 2 will eventually dissolve the boundary between both parts and you will start seeing them as one. The key point here is to realize that the syllabus for FRM is just one and that two parts have been made only for the convenience of the candidates. It has been observed in the past that the % of numerical in part 1 is more than that in part 2. Channel your preparation accordingly.
Before the exam
Try and finish the entire syllabus at least 10 days before the exam as you would need to spend significant amount of time in practice exams and revisions. The syllabus is so huge that even if you allocate a meagre 10 minutes per chapter for revision, 130 topics would take roughly 22 hours. Avoid learning new topics in the last week and instead concentrate on revising other known topics.
Design a schedule that suits you and strictly adhere to it. Remember that perseverance is the key to success. All the best!!
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