Download Financial Risk Manager (FRM)

Financial Risk Manager (FRM) Handbook
Fifth Edition (2009)
by
Philippe Jorion
List of Clarifications, Corrections, and Typographical Errors
November 14, 2009
The following is a list of clarifications and corrections brought to our attention by readers with a keen eye.
Thank you for your feedback, which is essential to help us improve future editions. By so doing, you help to
maintain the high quality of the FRM designation.
Comments should be sent to: [email protected]
Also, please note that have not written the Practice Exams CD, for which GARP should be contacted.
Substantial Clarifications and Corrections: (changes in bold)
Ch. 1.
P. 26. Example 1.6. The correct answer is a, not d. The explanation is correct.
Ch. 6.
P. 158. Example 6.11 The correct answer is c, not d. The explanation should be clarified to: “The lower
bound is c  SK e-r = 5045 exp(-0.03×2) = 5042.38 = 7.62. Hence, the difference is 42.38.”
Ch. 8.
P.196. “which multiplied by the 4% present value factor gives $980,392.” should be
“which multiplied by the 3% present value factor gives $985,222.”
P. 204. 6 lines from bottom. Change ‘six-month maturity” to “one-year maturity” because in this case we
assumed annual payments.
Ch 9.
P. 219. “$260 million” should be “$1,143 million”; “which is more than 800 times larger” should be “which
is much larger”.
P. 230. “the dividend yield is at 2%, and the interest rate at 1%”. Replace by
“the dividend yield is at 1%, and the interest rate at 2%”.
Ch. 10.
P. 268. Example 10.3. The correct answer is c, not b. The explanation is correct.
P. 268. Example 10.6: FRM Exam 2007—Question 27. This answer is not relevant, as there is no such
questioning the text. The answer to 2007—Question 112 is correct.
Ch. 11.
P. 295. Example 11.8. Change “Answer c.” to “Answer d.” The explanation is correct.
Ch. 12.
P. 313. Example 12.5. Correct answer is d. Sell 25.
Replace “to buy is 0.626 x 1,000/25 = 15.03” by “to sell is 0.626 x 1,000/25 = 25”
Ch 17.
P. 411. Clarification: “on-the-run” bonds are the most recently issued bonds within a maturity range and
hence the most liquid. Otherwise, the bonds are called “off-the-run”.
P. 426. Example 17.1. The correct answer is a., not c. The explanation is correct, however.
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Ch 19.
P. 477. The explanation for the answer to 19.8 is correct but the answer is a., not b.
P. 478. The answer to Example 19.13 is for another question. The correct answer is:
Example 19.13: FRM Exam 2005—Question 74
b. From Table 19.7, the typical recovery rate for senior unsecured debt is 40%.
Ch. 20.
P. 498. Example 20.10. The correct answer is d, not b. Solutions II and IV are right. The explanation is
correct.
P. 498. Example 20.11. To clarify, add: Answers I and III are correct.
Ch. 21.
P. 521 and 522. In Figures 21.13 and 21.14, the top panel should have r  and the bottom panel should have r
. Also, drop the sentence “In Figure 21.13, the bank is long both a receive-fixed year swap.
Ch.22.
P. 557. The answers to questions 22.4 and 22.5 should be exchanged.
Ch.29.
P. 697. Example 29.15. The correct answer is b., not c. The explanation is correct, however.
Minor Typos and Clarifications: (changes in bold)
Ch.1.
P. 13. Figure 1.4. Under the horizontal axis, y0-y should be y0+y
P. 25. In “Important Formulas”: “Conventional duration” should be “Modified and conventional duration”
P. 28. Table for Example 1.14 has unneeded 8 in “Par” column.
Ch 2.
P. 37. In Equation (2.16), insert comma in f12(u1, u2)
P. 50. Equation (2.46) should have (x)’-1(x )
P. 57. f(X=8)=0.02% should be f(X=8)=0.20%
Ch 3.
P. 72. Line after Equation (3.19). “where  depends on the confidence level and the selected density
function.”
Ch 4.
P.89. “They allow financial engineers…”
P. 105. “Let N be an n × 1 vector” should be “Let N be a 1 × n vector”
Ch 5.
P.119. Equation (5.8) should have -1 in the inner parts, er* /er1 = exp [(rr*)1  (rr*)
P.124. Last line should read exp(+0.03 × 3/12)/exp(-0.06 × 3/12) = 1,022.8. The solution is correct.
Ch 7.
P. 168. “cF each period” should be “cF at each period”
P. 190. “PAC bond5” should be “PAC bonds”
P. 204. “the FRN will behave like a bond with a six-month maturity” should be “one-year maturity”
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Ch 8.
P. 212. “wReceive” should be “Receive”
P. 215. Example 8.4. 125.69-1.1979×95.5 gives 11.29, 12.87, 7.84, and 11.58. The answer is correct.
Ch 9.
P. 234. In Table 9.5, second Yen Receipt should be ($).
Ch.11
P. 280. Equation (11.8), the equality should be  instead
P. 286. “group of 31 stock markets” should be 11.
P. 295. “Answer c. will produce unreliable…” should be Answer d.
Ch.12.
P.311. in “Key Concept”, “by the the” should be “by the”
Ch.13.
P. 328. Change (15.24) to (13.25)
P. 337. In Example 13.4, S=78 should be S=68.
Ch.14.
P. 342. Fifth line “the assumption is that: should be “the assumption that”.
P. 348. “0.01/(1-0.03-0.95)=0.7 daily” should be “0.01/(1-0.03-0.95)=0.5, or 0.7 daily volatility”
P. 357. Example 14.4. 0.006 should be 0.005. Answer is correct.
Ch.15.
P.365. Before Equation (15.12), add “,where k represents a particular data set”
P.372. In Equation (15.17), “P*t=PV($1)” should be “P*t=PV(£1)”
Ch 16.
P. 387. 9th line from bottom: “this measure is appropriate…”
P. 391. 3rd line from bottom: “ is 1.5%” should be “ is 1.5”
Ch 17.
P. 402. 7th line from bottom: across
P. 410. 8th line from top: so part of its
Ch 18.
P. 436.
P. 438.
P. 439.
P. 439.
4th line from the bottom: puts in motion a legal process.
E[CL] = $13.25
need to describe
In the variance equation (Li-E[CLi])2, the second subscript should be dropped.
Ch 19.
P. 468. Third bullet point: as measured by higher credit ratings
P. 470. “investors want to get risk of” should be “investors want to get rid of”
Ch. 20.
P. 494. Second paragraph in example. “We assume a leverage factor such that x=0.9, which implies a face
value of K=$99.46 and a risk-free current value of Ke-rt=$90.” To be more logical, the sentence could read:
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“The debt face value is K=$99.46, which implies a risk-free current value of Ke-rt=$90 and a leverage factor
of x=0.9.”
Ch. 21.
P. 508. “Figure 21.7 presents the profile…” To clarify, add: “in dollars relative to a notional of $100.”
P.527. Example 21.6. To clarify, add after “is not at risk”: “, because it is subsumed in exposures.”
Ch.22.
P. 537. Second paragraph. Replace 4.12 by 4.21, which is the number in the table.
P. 537. 7th line from bottom. To clarify, replace Otherwise by “In addition”
P. 557. The answers to questions 22.4 and 22.5 should be exchanged.
Ch.28.
P. 666. 3rd line from bottom. “catpial” should be “capital”
Ch.29.
P. 667. 4th line from bottom. Change “was to minimum capital requirements” to “was to set minimum
capital requirements”
P.685. Table 29.10. PD should be 10.00%, not 0.00%, just above 20%
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