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PRMIA :: How to Prepare for the Exam
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If you are a practicing risk manager, you are already preparing for the exam just by going
to work each day. At your work, you interact with other professionals. You read industry
magazines, software manuals, company policies and procedures, academic journals,
websites and regulatory notices. You attend risk committee meetings, prepare risk
reports, give presentations and write papers. You attend PRMIA regional chapter
meetings, participate in on-line forums and attend risk management conferences. All of
these activities prepare you for the PRMIA Certified Risk Manager exam.
Still, you may feel that you have some weaknesses. If you work primarily with credit risk
on the job, you may want to brush up on issues related to market risk or operational risk.
Perhaps your work is not as quantitative as that of some risk managers, and you feel a
need to review basic mathematics. Look at the exam content outline and decide on which
areas you most wish to focus. Below, we outline how to design your own personalized
study program. We detail some of the many references available. Where possible, we
have identified free resources. Where we mention books, we try to give you choices.
There is no need to buy new books if you can study what is already on your shelf. If
you have a book or article that you like, but we don’t mention it, use it anyway! Our list
is by no means exhaustive of what is available. The following narrative is broken down
by subject category, generally paralleling the content of the exam. Citations for all
references are provided at the back of this guide. Remember that, in keeping with our
mission, members are able to list and rate the usefulness of these and other resources on
the PRMIA web site.
At the end of this section is a simple form to help you identify gaps in your library and
referring you back to our guide to fill those gaps. Where gaps exist, we encourage you to
search some of the used bookstores listed on the PRMIA web site where texts can often
be purchased at substantial discounts. Moreover, many universities and colleges will
carry these books on their shelves. We encourage you to be resourceful in finding
existing, free or discounted resources!
Mathematics
The mathematics section of the exam tests for topics that are typically covered in onesemester
introductory courses in linear algebra, calculus and probability. In addition,
more specialized topics from probability are also tested, such as lognormal distributions,
skewness, kurtosis and principal component analysis.
There are many excellent texts on basic linear algebra, calculus and probability. If you
have texts left over from your university days, use them. Otherwise, for linear algebra
consider Strang (1988) or Lipschutz and Lipson (2000). Economics books, such as
Sydsaeter and Hammond (1995) often review basic linear algebra in a manner relevant
for financial risk management. For calculus, Thomas and Finney (1996), Stewart (1999) and Anton (2001) are standard texts. For basic probability, consider DeGroot (1986) or
Ross (1995).
For more specialized topics in probability, consider a web search. Also, refer to some of
the finance and risk management books described below. In particular, the formula for
the standard deviation of a linear polynomial of random variables is covered in finance
texts relating to portfolio theory as well as texts that discuss value-at-risk. Evans,
Hastings and Peacock (2000) is a handy reference covering topics such as skewness,
kurtosis and the lognormal distribution. Many econometrics texts cover principal
component analysis, as does Johnson (1998).
Finance
The exam tests for a number of topics in finance. Standard finance texts cover most of
these. If you have previously studied for CFA exams or taken applicable university
courses, you should already have applicable texts. Otherwise, standard texts include:
Elton and Martin (1995), Sharpe, Alexander and Bailey (1999), Reilly and Brown (2000)
and Bodie, Kane and Marcus (2002).
The exam tests for understanding of Black-Scholes-Merton theory and related topics,
such as put-call parity. To understand how Black and Scholes derived their famous
formula, you might start with their paper, Black and Scholes (1973) or take a look at
Merton (1973). Chriss (1997) and Natenburg (1994) offer intuitive treatments. See also
elementary books on derivatives pricing, such as Hull (2000).
For discussions of financial instruments, see Hull (2000) or any of the standard texts
recommended above. Supplementary treatments of compounding methods and simple
bonds are provided by: Kellison (1991) and Sundaresan (2002). Supplementary
treatments of derivatives, including forwards, futures, swaps and options, are provided
by: Briys (1998) or Smithson (1998). Fabozzi (1997) is an excellent text on fixed income
mathematics.
The exam tests for in-depth knowledge of two representative markets: the money/FX
market and commodities markets, specifically natural gas and crude oil. For the
money/FX market, Stigum (1991) is a non-technical classic, but it is somewhat dated (a
new edition is due out in a few months). For supplementary or alternative treatments, see
any of the finance books recommended for portfolio theory above or a more specialized
book, such as Questa (1999) or Walmsley (2000). See also parts of (Free) Federal
Reserve (2002) and Federal Reserve Bank of Richmond (Undated) for descriptions of
various instruments traded in the money markets. For an overview of commodities
markets, see Reuters (2000).
Financial Risks
There are a number of general texts on financial risk management that treat most or all of
the financial risk topics on the exam. These include: Dowd (1998), Crouhy, Galai and
Mark (2000), Gleason (2000), Jorion (2000), Ramos (2000) and Culp (2001). Also, there
is plenty of information on the Internet if you perform web searches for specific topics.
For an alternative treatment of duration and convexity, consider Douglas (1990), Questa
(1999) or Hull (2000). For the Greeks, consider any elementary book on derivatives, such
as Hull (2000). For supplementary or alternative treatments of value-at-risk, see the (free)
RiskMetrics Technical Document (1996), (Free) Linsmeier and Pearson (1996), Best
(1998) or Butler (1999).
For stress testing, see: (Free) Laubsch (1999).
For an alternative general treatment of credit risk, see Caouette (1998). For credit risk
modeling, see the (Free) CreditMetrics Technical Document (1997), (Free) Basle
Committee (1999), Ong (1999), (Free) Kern and Rudolph (2001) or Saunders and Allen
(2002). There is a tremendous amount of information on credit derivatives available if
you search the Internet.
For an alternative treatment of operational risk, consider a (free) Basle Committee (2001)
Operational Risk Consultative Document, King (2001) or Cruz (2002).
Case Studies
Case studies are specific topics for which detailed knowledge will be tested.
For Barings, a number of books have been published, including Rawnsley (1995) or Fay
(1997). See the Bank of England Report (1995) or (Free) IFCI (UndatedA). Leeson
(1996) offers a personal account, which has been converted into a movie Rogue Trader.
Studying any two of these should be adequate preparation.
For Metallgesellschaft, a number of journal articles have been written. See some or all of:
Culp and Miller (1995), Edwards and Cantor (1995), Mello and Parsons (1995), Pirrong
(1997), Bollen and Whaley (1998), Hilliard, Jimmy E. (1999) and (Free) Krapels (2001).
Most are available in the edited collection Culp and Miller (1999).
For LTCM, see (Free) United States Treasury (1999), later chapters of Dunbar (2000),
Lowenstein (2001), (Free) Jorion (2000) and (Free) Shirreff (Undated).
The case study for the Group of 30 Report requires simply that you study the report itself
or failing access to that, (Free) IFCI (UndatedB).
The case study for the PRMIA code of conduct and bylaws requires simply that you
study those documents, which are available on the web site. (the bylaws will be available
on the PRMIA website when the final version is passed by the PRMIA Board).
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