PRM Exam III

Risk Management Practices, Market Risk, Credit Risk, Operational Risk

Exam III of the PRMTM certification tests a candidate’s knowledge and understanding of the modern risk management practices.

Exam III is split into three parts, which address market risk, credit risk and operational risk in turn. These three are the main components of risk borne by any organization, although the relative importance of the mix varies.

The following syllabus and objective statements are as per the latest PRM Guide.

Note: If an LOS is a link, that means the material for that LOS is available. The dates mentioned against each LOS is the date when the study material for that LOS is scheduled to arrive.

  • Capital Allocation and RAPM

    • Describe the Role of Capital in a Financial Institution
    • Define and Describe the different types of capital
    • Demonstrate Economic Capital
    • Describe the different approaches to calculating Economic Capital
    • Describe Regulatory Capital
    • Explain the Basel Norms
    • Explain the Derivation of Regulatory Capital
    • Explain Capital Allocation
    • Demonstrate the Risk Contribution Methodologies for Economic Capital Allocation
    • Explain Risk Adjusted Performance Measurement (RAPM)
    • Demonstrate Risk Adjusted Return On Capital (RAROC)

Market Risk

  • Market Risk Management

    • Define Market Risk
    • Explain the importance of market risk
    • Differentiate Market Risk from other risks
    • Describe the Market Risk Management Tasks
    • Describe the organization of Market Risk Management
    • Explain Market Risk Management in Fund Management
    • Explain Market Risk Management in Banking
    • Explain Market Risk Management in Non-financial firms
  • Advanced Value at Risk Models

    • Discuss the issues related to the three VaR models
    • Demonstrate Volatility Clustering Models
    • Demonstrate impact of Volatility Clustering on VaR
    • Discuss GARCH model
    • Demonstrate VaR with the Student’s t distribution
    • Explain VaR with Extreme Value Theory
    • Demonstrate VaR with Normal Mixtures
    • Describe the rules for disaggregating risk
    • Demonstrate Incremental VaR (IVaR)
    • Demonstrate Component VaR (CVaR)
    • Demonstrate Principal Component Analysis (PCA)
    • Explain VaR with PCA
  • Stress Testing

    • Define Stress Testing
    • Describe the historical and conceptual context of stress testing
    • Explain Historical Scenarios Approaches
    • Demonstrate Hypothetical Scenarios Approaches
    • Demonstrate Algorithmic Approaches
    • Describe Extreme Value Theory as a Stress-Testing Method
  • Liquidity Risk Management

    • Describe the factors which determine liquidity risks, and their pricing considerations
    • Identify the processes concerning collateral management
    • Discuss the implications of managing liquidity across business lines, legal entities, and currencies
    • List the elements of funding diversification and market access
    • Contrast the choices for intra-day management of liquidity
    • Identify and differentiate the early warning signs of compromised liquidity
    • Describe the components required for the disclosure of liquidity risk
    • Identify, and design, the requirements of Stress Testing and a liquidity buffer
    • Characterize the basic elements of financial contracts, their corresponding liquidity, and the relevance of time
    • Describe the essential components of market, and funding, liquidity risk
    • Discuss the impacts of counterparty / credit risk on liquidity relative to speads, defaults, credit enhancements, and asset based enhancements
    • Describe the impact of behaviour on liquidity with respect to drawings, repayments, prepayments and draw-downs
    • Derive the impact of insurance risk on liquidity
    • Demonstrate the purpose, and effect of liquidity gap reports, and Liquidity at Risk (LAR)
    • Describe the components of the contents used for internal and external liquidity reporting

Credit Risk

  • Credit Exposure

    • Define Pre-settlement Risk
    • Define Settlement Risk
    • Demonstrate Exposure Profiles of Standard Debt Obligations
    • Demonstrate Exposure Profiles of Derivatives
    • Explain Mitigation of Exposures
  • Default and Credit Migration

    • Define and Discuss Default Probabilities and Term Structures of Default Rates
    • Define Credit Ratings
    • Demonstrate Measurement of Rating Accuracy
    • Describe the Methodology of Credit Rating followed by Rating Agencies
    • Demonstrate Transition Matrices, Default Probabilities and Credit Migration as done by Rating Agencies
    • Explain Credit Scoring
    • Discuss the Estimation of the Probability of Default
    • Demonstrate Market-Implied Default Probabilities
    • Explain Credit Rating and Credit Spreads
  • Portfolio Models of Credit Loss

    • Define Default
    • Describe new approaches to Credit Risk Modelling
    • Explain Credit VaR
    • Define Credit Migration
    • Describe the Credit Metrics Framework
    • Demonstrate Credit VaR for a single Bond/Loan
    • Demonstrate the Estimation of Default and Rating Changes Correlations
    • Describe the Credit VaR approach of a Bond/Loan Portfolio
    • Explain the Conditional Transition Probabilities – CreditPortfolioView Model
    • Explain the idea of contingent claim approach in credit risk measurement
    • Demonstrate Structural Model of Default Risk: Merton’s (1974) Model
    • Demonstrate Estimation of Credit Risk as a function of Equity Value
    • Demonstrate the KMV approach
    • Demonstrate the Actuarial Approach
  • Credit Risk Capital Calculation

    • Explain the calculation of Economic Credit Capital using Credit Portfolio Models
    • Demonstrate Minimum Credit Capital Requirements under Basel I
    • List the Weaknesses of the Basel I Accord for Credit Risk
    • Explain the Latest proposal for Minimum Credit Capital requirements
    • Describe the Standardised Approach in Basel II
    • Describe the Internal Ratings Based Approach (IRB) for Corporate, Bank and Sovereign Exposures
    • Describe the Internal Ratings Based Approach (IRB) for Retail Exposures
    • Describe the Internal Ratings Based Approach (IRB) for SME Exposures
    • Describe the Internal Ratings Based Approach (IRB) for Specialised Lending and Equity Exposures
    • List the new components of Pillar II for credit risk
    • Explain Credit Model Estimation and Validation in Basel II
    • Describe Securitisation in Basel II
    • Describe the application of credit risk contribution methodologies for Economic Credit Capital Allocation
    • Demonstrate the Shortcomings of VaR for Economic Credit Capital and Coherent Risk Measures

Operational Risk

  • The Operational Risk Management Framework

    • List the emerging Operational Risks in Banks
    • Discuss main types of losses that occurred in practice
    • Define Operational Risk
    • Describe the Operational Risk Advanced Measurement Approach (AMA) Framework
    • List the objectives of an operational risk management function
    • Describe the scope of an operational risk management function
    • Describe the Key components of Operational Risk
    • Describe the Supervisory Guidance on Operational Risk
    • Explain the Risk Catalogue
    • Explain the Operational Risk Assessment Process
    • Describe the Operational Risk Control Process
  • Operational Risk Process Models

    • Explain the relevance of Operational Risk Management (ORM)
    • Describe how to develop and apply operational risk models
    • Describe the various ORM tools
    • Describe the Top-down models
    • Describe the Bottom-up models
    • Describe the Key Attributes of the ORM Framework
    • Describe the Integrated Economic Capital Model
    • State the objectives of an ORM programme
    • Demonstrate Risk Transfer
    • Discuss the IT Outsourcing case study
  • Operational Value-at-Risk

    • Explain the Loss Model Approach
    • Explain the Frequency Distribution
    • Explain the Severity Distribution
    • Demonstrate the Internal Measurement Approach
    • Explain the Loss Distribution Approach
    • Demonstrate Aggregating Operational Risk Capital (ORC)
  • Enterprise Information Risk

    • Describe the dangers and risks inherent in risk models, transparency, and risk monitoring, of having poor risk information
    • Explain some of the causes of poor data
    • Construct a clear plan for solving the problem of data quality
    • Demonstrate an understanding of the 8 criteria, and priorities for analyzing data
    • Explain, and demonstrate, the need for holistic Risk Information Management Environments
    • Describe the 7 components of a Data Management Framework, and a Logical Data Model
    • Discuss the 5 Critical Success Factors of implementing a Risk Information Management Environment
    • Identify the 4 components of AS-IS to TO-BE environments
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