A resource for the Professional Risk Manager (PRM) exam candidate. Sample PRM exam questions, Excel models, discussion forum and more for the risk professional.
I came across a recent paper on the Volcker rule by Darrell Duffie, who is a professor at the business school at Stanford University. It is a brilliant piece of writing, with no equations and a writing style that easy to understand. A key nugget I found in this article was the author's explanation of market making. In the first part of this paper, Dr. Darrel Duffie explains how market making actually works in practice, and how large banks and broker-dealers make markets in securities. If you have ever been intrigued by how market making works, and what factors market makers have to think about as they offer bid-offer quotes on a security at all times, this is a great read.
Professor Duffie of course then goes to provide his opinion on the Volcker rule, and how it might be better to use capital cushions to protect against the risks from proprietary trading by regulated institutions rather than something as complex as the Volcker rule and its implementation is turning out to be.
Earlier this week I attended an event on operational risk organized by PRMIA's New York chapter. Operational risk has always had the perception of being less exciting than the various forms of financial risk, but as recent events (SocGen, UBS) have shown the perils can be just as catastrophic.
Regardless of the economy and the 10% unemployment, it appears there is no shortage of jobs in risk management at the moment. If nothing else, one outcome of the financial crisis has been that risk managers have gained a great deal of importance within firms. They are all adding staff, implementing new processes and systems, and preparing for staying in compliance with new regulations and reporting.
Seems to me that many of these risk management jobs touch IT, project management, systems implementations, process redesigns, Basel, capital calculations and risk attributions to divisions - and go beyond number crunchers doing VaR stuff. Because many of these jobs may not be the standard analyst variety, a good way to reach them may be either through the network or by trying to move around in the organization you are in.
More information keeps coming out on Basel III. The BCBS is now formally calling it Basel III. It is expected to be finalized at the next G-20 Meeting in Seoul in November 2010.
Here is a link to the various official documents issued by the BCBS on Basel III - something you might find useful to keep an eye on as new documents are released.
Every now and then I get an email from someone who would say they are interested in writing the PRMIA exams, but find the math too difficult. “I am not a math guy”. “I have no math background. I studied business.”
Without a doubt, there is some element of math involved in risk management. The PRMIA syllabus has its fair share of math. Some aptitude for math is certainly helpful, but determination takes you further. My personal view however is that even though some of the math required for the PRM exam may be stuff you may not have studied before, it is not particularly difficult if you give it a bit of attention and time. There are just a couple of concepts you need to get clear – particularly understanding how distributions, quantiles etc work, a little bit of understanding first and second derivatives, and the rest is all reasonably doable.
Below is a list of executive recruiters who focus largely on risk management jobs. I have provided links to their websites where they list the opportunities they are working on. Feel free to contact them directly. Their mention below is not an endorsement by me, and nor have I been paid for listing them below. Also, if you have had any success with any recruiters on risk jobs, please do let me know so I can include them in the list.
I was curious to see where Riskprep's membership is coming from. These are folks who have taken the time to 'register' at Riskprep, and provided their email addresses. Here is what the membership looks like by country, arranged in descending order of the percentage of membership by country. Just a piece of statistic, not much to infer from though.
A brief message to all PRM candidates: focus on the learning, and enjoy it. Don't worry too much about the exam. If you are passionate about it, you would have enriched your life regardless of the outcome of the exam. If you focus on the concepts and internalizing the learning rather than worrying about what questions will be asked, you will find your learning to be a great experience, and not a drudgery. Remember - you are studying for this certification because you want to, and not because you have to (ie, it isn't your high school exam that you had to have done). So enjoy it. Here is a great video for when you are looking for a break from your studies. I would highly recommend taking 20 minutes out for this. Prof Srikumar has taught at Columbia, Haas and London Business Schools.
If you are subscribed to both Exams 1 and 2 on Riskprep, you will notice that some of the questions are present in both the questions pools. These relate to options and the Greeks, and the reason to put them in both the places is that the exam for either may ask questions relating to these. So better safe than sorry, and therefore the questions are there in both the question pools. That helps those who are subscribed to either Exam 1 or Exam 2 alone.
Here is an interesting extract from Lloyd Blankfein's testimony to the Financial Crisis Inquiry Commission on Goldman's risk management practices. I would not want to add much by way of editorial comment here, except that Lloyd Blankfein gets to the heart of risk management - which isn't about fancy math or regulation alone.
"Our approach to risk management is rooted in accountability, escalation and communication. A large part of this discipline is reflected in the marking process, which assigns current values to financial assets and liabilities. We believe that rigorous fair value accounting for financial instruments is fundamental to prudent management because it facilitates a clear view of risk. It allows us to manage market risk limits, monitor exposure to credit risk and manage our liquidity requirements.
Recently I received a mail from someone who used Riskprep to say that he practiced all the questions on the site multiple times, and yet he did not pass. I am confident that he will get through in his next attempt, he wasn’t too far off.
I did however wish to stress this message to all candidates: be aware that Riskprep cannot be, and is not even designed to be your primary study source. You need to read the handbook. You need to understand it well. If there are topics in the handbook that you don’t understand, you should read Hull or other reference text book to clarify that particular topic. The idea behind Riskprep is to provide you ‘exam-like’ questions. You can use it to test if you understand the subject matter at a level that goes beyond skimming dense text in the handbook. But the question pool at Riskprep is finite and once you have seen the answers, it is very likely that you will get it right the next time around.
In the past month (ie Dec 2009 - Jan 2010) I have received some feedback on the level of difficulty of the PRM exams. The feedback is consistent - the questions have been described as 'weird' and 'twisted', which probably means PRMIA is going more towards a model of increasing the difficulty level of the exams. My personal view of course is that exams should test knowledge and expertise, and not try to trick the exam taker with confusing choices that can be interpreted in different ways. My own experience from having taken the exams last year is that some of the questions could have been framed better.
However, that is not something we have control over, the only thing we control is how we answer those questions. My advice is for everyone taking the exams to improve their conceptual understanding of issues, so that no matter how a question is framed, you are able to understand the intent and answer it. At the same time, remember that the bar for passing the exam is set at 60%, which means no matter how strange the questions appear, you should still be able to pass with a comfortable margin if you have studied well. I also have a post on the 'forum' on not breaking into a sweat if the questions appear unfamiliar - have a read of that as well.
A question that arises in the mind of any PRM holder or candidate is how having the designation affects his (or her) job prospects. Can it help find a better job, get a promotion, a payrise, or for someone not working in the risk field, can it help them gain an entry into the profession? Well, like everything, it depends. There isn't an easy answer to this question. But one thing that can be said about the PRM designation is that it is known to practitioners in the industry, and well respected. If the person interviewing you, or maybe even your boss is a PRM, or a member of PRMIA, then certainly getting the designation can only help. It establishes the fact beyond doubt that you have a minimum level of competence and that your chances of success in a risk management role are greater than similar others who do not have such a certification. Note that I said *similar* others. Of course, if you are just a few years out of college with no experience in the markets, then a PRM is not going to give you more credibility than the math PhD who has spent ten years in the field.
The same goes for career switchers. The PRM designation may help you get a foot in the door, or it may not. It certainly cannot hurt. What it will definitely do is improve your knowledge levels to a point that you will be far more confident dealing with interviewers, or doing a better & more structured job at your workplace. Over time, this can only lead to good things. But at the end of the day, there is no guarantee that a PRM certificate will get you a better job or help you switch careers. It can help, and like so many other things in life, we are children of chance, and a lot would depend upon your individual circumstances and the opportunities that come your way.
The PRM syllabus has changed, and candidates appearing for the exam after March 1, 2010 will be tested based upon the new syllabus. The changes do not affect Exams 1 and 2.
(Updates to the Riskprep question pool have been completed - March 18, 2010.)
The bulk of the change is in Exam 3, Risk Management Practices. New papers have been introduced and some available web based papers on stress testing, scenario testing and supervisory assessment of capital have been added. There have been changes to Exam 4 as well, where older case studies have been dropped and newer more relevant case studies have been included.
Futures and spot prices move in lockstep, but the moves are not identical. This is because the delta of a futures contract is not equal to 1. If it were, the futures contract would be an exact replacement for the spot security, but it is not so.
To understand this, consider the following scenario for a hypothetical security that is currently selling in the spot market at $100. Interest for 3 months is 3%, and expected dividend is $1, so futures sellers are offering a futures contract with a notional of $100 for $102 today. Just to keep the math simple, assume that at the end of the three months, the spot price stays at $100, ie the security earned no returns other than its dividend.
You may be very busy preparing for the exam, but remember the only calculator PRMIA will allow you to use is the standard Windows based calculator. It is important to spend 10 minutes familiarizing yourself with this calculator as it is just slightly different from the usual business calculators like the HP 12c or 17bii (or the TI 30) that you might be used to.
In particular, make sure you know in advance how to: