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FRM Part II Formulas

The document provides a comprehensive list of key formulas for the FRM Part II exam, categorized by topics such as Market Risk, Credit Risk, Operational Risk, Liquidity Risk, Interest Rate Risk, Risk Management, and Regression Models. Each formula is accompanied by its definition and relevant variables. It emphasizes the importance of understanding and practicing these formulas in context for effective exam preparation.

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Vivek Ayyagari
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476 views4 pages

FRM Part II Formulas

The document provides a comprehensive list of key formulas for the FRM Part II exam, categorized by topics such as Market Risk, Credit Risk, Operational Risk, Liquidity Risk, Interest Rate Risk, Risk Management, and Regression Models. Each formula is accompanied by its definition and relevant variables. It emphasizes the importance of understanding and practicing these formulas in context for effective exam preparation.

Uploaded by

Vivek Ayyagari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FRM Part II Formulas

all FRM part II formulas

The FRM (Financial Risk Manager) Part II exam is comprehensive and includes a wide range of
formulas related to risk management. Below are some of the key formulas you should know for FRM
Part II, divided by relevant topics:

1. Market Risk
Value at Risk (VaR):

VaR = Z × σ × T ​

Where:

Z = Z-score corresponding to confidence level (e.g., 1.65 for 95% confidence)


σ = standard deviation of returns
T = holding period (in years, typically)
Expected Shortfall (ES) or Conditional VaR (CVaR):

1
1
ES = ∫ VaRα dα
1−α α
​ ​ ​

This is the average loss in the tail beyond the VaR threshold.

Portfolio VaR (using covariance matrix):

VaRportfolio = ​ wT Σw ​

Where:

w = vector of portfolio weights


Σ = covariance matrix of asset returns

2. Credit Risk
Credit Valuation Adjustment (CVA):

CVA = (1 − Recovery Rate) × Exposure at Default × Probability of Default


Exposure at Default (EAD): The measure of the potential loss in the event of a default.

Credit Spread:

Credit Spread = Yield on Risky Bond − Yield on Risk-Free Bond

3. Operational Risk

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Loss Distribution: Operational risk is typically modeled by a loss distribution, where:

L = Loss Amount
F (L) = Cumulative Distribution Function (CDF)
μ = mean loss
σ = standard deviation
Risk Control Self-Assessment (RCSA): This involves rating the likelihood and impact of operational
risks.

4. Liquidity Risk
Liquidity Coverage Ratio (LCR):

High-Quality Liquid Assets


LCR = ≥ 100%
Total Net Cash Flows over 30 Days
​

Net Stable Funding Ratio (NSFR):

Available Stable Funding


NSFR = ≥ 100%
Required Stable Funding
​

5. Interest Rate Risk


Duration (Macaulay Duration):

T
∑ t × PV of Cash Flowt
D = t=1
​ ​

Price of Bond
​

Modified Duration:

D
Dmod =
1 + ny
​ ​

Where:

y = Yield to maturity
n = Number of periods per year
Convexity:

T
∑ t(t + 1) × PV of Cash Flowt
C = t=1
​ ​

Price of Bond
​

Duration Gap:

Market Value of Liabilities


Duration Gap = Duration of Assets − ( ) × Duration of Liabilities
Market Value of Assets
​

6. Risk Management and Measurement

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Sharpe Ratio:

Rp − Rf
S=
​ ​

σp ​

Where:

Rp = Portfolio return
​

Rf = Risk-free rate
​

σp = Standard deviation of portfolio returns


​

Jensen's Alpha:

α = Rp − [Rf + β(Rm − Rf )]
​ ​ ​ ​

Where:

β = Beta of the portfolio


Rm = Return on the market
​

7. Capital Asset Pricing Model (CAPM)


CAPM:

Ri = Rf + β(Rm − Rf )
​ ​ ​ ​

Where:

Ri = Expected return on asset i


​

β = Beta of asset i
Rm = Expected market return
​

Rf = Risk-free rate
​

8. Regression and Time Series Models


Linear Regression:

Y = α + βX + ϵ

Where:

Y = Dependent variable
X = Independent variable
α = Intercept
β = Slope
ϵ = Error term

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Autoregressive (AR) Model:

p
Yt = α + ∑ βi Yt−i + ϵt
​ ​ ​ ​ ​

i=1

Where:

Yt = Time series value at time t


​

p = Order of autoregression
ϵt = Error term
​

These are just some of the major formulas you should be familiar with for FRM Part II. It's a good idea
to practice solving problems involving these formulas and understanding the contexts in which they
are applied.

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