July 29, 2009
Financial Markets and products is probably one of the trickiest topics of FRM Exam. It covers a wide range of topics “ From Introduction of financial markets to Options and Futures, Swaps, Fixed Income Securities and hedging! If we look at the readings assigned to this topic, we find that it has a lot of readings “ 10 chapters of John Hull, Corporate Bonds from Frank Fabozzi, 2 chapters from Saunders and 2 readings from commodity derivatives. Similar is the weight assigned to Financial markets and products section “ 30% for Part I and 15% for full Examination! In a nut shell, this section is a key section as far as FRM Exam is concerned!
Originally this section was clubbed in the market risk section of FRM Exam (Till 2008). So analyzing the history of this section becomes a little difficult. Nonetheless, if we map the learning objectives to last year’s examinations, we can find the pattern and some of the low hanging fruit.
The broad classification of topics covered in Financial Markets and Products is:
The number of unique topics in this section is simply flabbergasting! For anybody who is new to financial markets and instruments, the width and depth of this section can be intimidating. If we look closely at the last 3-4 years Sample papers, there are practically 2-3 questions from each of the topics! So it is difficult to single out any topic, which is important!! Anyways.. lets analyze it closely and give it a shot.
There are normally atleast two questions on converting rates based on different compounding frequencies. It is one of the low hanging fruits as far as this section is concerned.
Please learn the usage of the calculator. You should be a master in usage of calculator, to make sure that you crack the exam.
To draw the curves, you just need to remember the payoffs of Long Call, Short Call, Long Put, Short Put, Long Spot, Short Spot and similarly for futures. The diagrams are easy to understand and you just have to super-impose one diagram over the other to get to the desired output.
Delta is simply the rate of change of option with respect to the underlying. So if you have an exposure to the underlying you need to change your options to make sure that you are hedged!! As simple as that!!
For delta hedging,
Number of shares = (Number of calls) x (New delta – Old delta)
Apart from this there is generally a question on relationship between delta of options and Black-Scholes model. The question would test your understanding of Black Scholes model along with Greeks.
Apart from this, there are generally 2-3 questions on Swaps. The questions on pay-offs are easier, and the ones on valuation are generally tougher!! The simplest thing to remember
This is just the start, and if we look at the syllabus, there are quite a lot of things that you can be tested upon. But I think, if you are able to master these concepts, you will sail through the Financial Markets and Products Module.
Once again Pristine Advice – Strategize : Find your strengths and play on them!!
We will take some questions on the above formulae and see, how to tackle them.. in the meanwhile. Keep preparing hard!!
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