Which one to choose CFA or FRM certification?

CFA Vs FRM had always been a great confusion among the aspirants interested in breaking into finance domain. CFA the chartered financial analyst exam is the lucrative title that we come across in wall street jobs often has been confused with Financial Risk Manager title that deals with different risk aspects of financial products like market risk, credit risk, operational risk etc. The title of the job role as well as pay rate can vary depending on the stream chosen by aspirants Which is good for a beginner in finance? The answer ultimately depends on the position you are looking for in finance particularly investment banking domain FRM - Financial Risk Manger is a certification with risk management as focus. Though there is a basic coverage of quantitative methods four major risk disciplines (credit risk, market risk, operational risk, investment risk ) are of prime focus in FRM CFA - Chartered Financial Analyst is a reputed Professional credential from CFA Institute. It is offered in 3 levels and provides a 360 coverage of finance including ethics, valuation methods to name a few So if you want to break into investment banking job roles like equity analyst it is preferable to go for CFA. Risk specific jobs like risk analyst, enterprise risk manager etc can be easily cracked using FRM credential Note : This article is the personal opinion of the blog author Investment Banking Interview Questions: Investment banking a lucrative career option comes with clearing tough interview questions. Learn about many different products, concepts and strategies used in investment banking companies 1) What are the many different terms associated with futures contract and what do they mean? Short futures position - Seller of futures contract has short futures position Long futures position - Buyer of futures contract has long futures position Clearing house - Takes opposite side of transaction. It is the regulatory authority of the exchange. Tick size - Minimum price of fluctuations of the contact Margin - Is cash or highly liquid collateral placed in an account to ensure that any trading losses will be met. Marking to market - Daily procedure of adjusting the margin account of balance for daily movements in futures price. Initial Margin - Amount required to open a futures position Maintenance Margin - Minimum margin account balance required to retain futures position(Short of long position) Margin call - Is made when margin account balance is less than the maintenance margin 2) Give details on corporation bonds and notes :- Corporations borrow long term capital through debt instruments known as bonds.Corporations borrow intermediate term financing through notes.Corporations borrow short term financing through commercial loans. Corporations borrow using short term instruments like commercial papers. 3) What doe Amend The Broker Dealer (BD) mean? The license of brokers/dealers must change upon change of entity mix change. This is referred to as "Amend The Broker Dealer (BD)" 4) Give details on Cash and Carry Vs Reverse Cash and Carry Arbitrage Techniques :- Cash and Carry Vs Reverse Cash and Carry - Arbitrage Techniques has been confusing. Lets consider the following three components 1) Stock or an asset 2) Money (Zero coupoun bond) 3) Forward/Futures contract When a forward/futures is overpriced - we sell the futures/forward we purchase a stock/asset and we carry some money. This scenario is called as cash and carry. When a futures/forward contract is under priced - we sell the stock/asset, put some money and purchase the futures/forward contract. This is called as reverse cash and carry. These are two major arbitrage techniques 5) What is a stock exchange? Give details on stock exchange across the globe :- Investment Banking Market Place, Market Place (Stock Trading) is like an ordinary market place where goods are exchanged.In this market place, financial assets are exchanged. Some good examples of financial assets include stocks, bonds, shares, debentures, options, futures etc.Some popular market places are : 1) AMEX - American Stock Exchange 2) BSE - Boston Stock Exchange, Bombay Stock Exchange(India) 3) CBOE - Chicago Board Option Exchange 4) CHX - Chicago Stock Exchange 5) CSE - Cincinnati Stock Exchange 6) ISE - International Security Exchange 7) NYSE - New York Stock Exchange 8) NASDAQ - National Association Of Security Dealers Automated Quotation 9) PHLX - Philadelphia Stock Exchange 6) What is risk tolerance? Risk Tolerance is the willingness or unwillingness of an individual or an organization to take risk.It is a major factor that determines the growth of the organization. There are two major categories of risk: 1) Risks with high probability of occurence but low impact (eg: an employee quiting his job in a projects due course) 2) Risk with low probability of occurence but high impact(eg:A natural disaster damaging the property) It is the responsibility of the manager to determine risks that are most occuring and most dangerous. It is the probability theory and the attitude of the person or organization that determines the risk tolerance. Ask Size : Ask size is the number of stocks that a seller is willing to sell at the quoted ask price/offer price/ask. For example, if the seller is selling 1000 securities at ask/askprice/offer price $6 then ask size is 1000 7) What does Booking The Basis mean? Booking the basis is an arrangement made between a buyer and seller giving either party the ability, at some future date, to determine the cash price of the forward sales agreement. Once the basis of a futures contract is booked, it is applied to the current futures price and is maintained for the duration of the contract. Also known as "deferred pricing." 8) What is a bear market? A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market. 9) What does leverage mean? Leverage is the action of using borrowed money to make money 10) What is ABC Paper - Asset-Backed Commercial Paper : ABC Paper - Asset-Backed Commercial Paper is a security whose value and income payments are derived from and collateralized/backed by a specified pool of underlying assets. 11) Give details on capital gains tax :- Capital Gains Tax is a type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price. Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold 12) What is an arbitrage? Arbitrage is a popular hedging strategy.The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. 13) Explain the trading term Ask Price/Offer Price :- Ask Price/Offer Price - Trading Term is popular among the investment banking community, stock traders. Ask price is also known as offer price. It is the price that a seller is willing to accept for selling a stock/security. In general amount of security willing to be sold at that price will be listed in ask. It is sometimes called as ask. 14) What is a yield? Yield is the relationship between coupon rate and price. It is used as a major concept while computing financial risk.Yield can be calculated using two major methods: 1) Current yield 2) Yield to maturity Current yield=Interest payment/Market value When a bond is trading at discount, yield is higher than the coupon rate. When the bond is trading at a premium, the yield is lower than the coupon rate. Coupon rate is the stated interest rate of the bond. 15) What is active investing? Active investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions. It is also known as active management.It refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. 16) Who is a portfolio manager? Portfolio manager is the person or persons responsible for investing a mutual, exchange-traded or closed-end fund's assets, implementing its investment strategy and managing the day-to-day portfolio trading. 17) What does mutual fund subadvisor do? Mutual fund subadvisor is a money manager who works outside of the fund, and is hired by a fund manager to help with an investment portfolio. These subadvisors are allowed to manage all or some of a fund's assets, and usually are given a set of investment objectives to adhere to when selecting securities 18) What is a layered fees? Layered fees are the two sets of management fees that are paid by an investor for the same group of assets. This practice is found in many types of investment vehicles such as wrap funds, variable annuities, registered investment advisor client accounts and even mutual funds 19) What is the difference between Risk Vs Uncertainity? Risk Vs Uncertainity had been a debate for over years. Risk - A variable that can be quantified in terms of probability is a risk Uncertainity - A variable that can't be quantified is an uncertainity 20) What is a futures contract? Exchange traded obligations to buy or sell a certain amount of underlying good at specified price and date Assets can be agricultural goods to stock indexes Mostly delivery is not taken in futures contract The futures position is closed or reversed prior to settlement date At any time Long Position = Short position Buyer and seller have no ideas of each others existence 21) What is American Depositary Share ADS? A U.S. dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange. American Depositary Shares (ADSs) are issued by depository banks in the U.S. under agreement with the issuing foreign company; the entire issuance is called an American Depositary Receipt (ADR) and the individual shares are referred to as ADSs. Depending on the level of compliance with U.S. securities regulations the foreign company wishes to follow, the company may either list its shares over-the-counter (OTC) with low reporting requirements or on a major exchange like the NYSE or Nasdaq. Listings on the latter exchanges generally require the same level of reporting as domestic companies, and also require adherence to GAAP accounting rules. 22) What is Quotron? Quotron are devices that help stock brokers obtain quotes, hign and low prices, last sales by keuing security symbol. 23) Give details on Alternative Trading System(ATS) :- Alternative Trading System (ATS) is a trading system that is not regulated as an exchange, but is a venue for matching the buy and sell orders of its subscribers. Alternative trading systems are gaining popularity around the world and account for much of the liquidity found in publicly traded issues. Regulation ATS was introduced by the SEC in 1998 and is designed to protect investors and resolve any concerns arising from this type of trading system. Regulation ATS requires stricter record keeping and demands more intensive reporting on issues such as transparency once the system reaches more than 5% of the trading volume for any given security. It constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16. 24) Why companies/firms issue stock? Stocks are instruments issued/sold by the companies to raise funding for their business operations. It is a means used by the companies to perform their operations with the money raised by initial public offering(IPO) without having to pull out money from their own pocket. 25) Who is Broker Dealer? A broker dealer in investment banking is a person or firm in the business of buying and selling securities operating as both a broker and a dealer depending on the transaction. 26) What is Big-Bath Behaviour? Big-Bath Behaviour takes place when a company is having a really bad year and the income reserves are not enough to offset the bad results they are about to report. The management knows that their stock price will drop and it will upset the investors.As a result management decides that it is best time to get rid of all the inconsistencies that will have a negative impact on the financial statements. 27) Give details on AFA - Afghanistan Afghani - Forex/Currency Trading :- The currency abbreviation or currency symbol for the Afghanistan afghani (AFA). The Afghanistan afghani is made up of 100 pul. The new afghani replaced the prior currency in early 2003, due to the low relative value of the nation's currency 28) What is Financial Information Exchange (FIX) Protocol? Financial Information Exchange (FIX) Protocol started with version 2.7 and gradually emerged to the level of 4.2.This is a set of rules to be used by firms involved in investment banking business. FIX determines the rules to be followed from order entry to closure. To put it in simple terms FIX provides information on STP (Straight Through Processing). It has been formulated for various products starting from equities and extending to derivatives, FX(currency exchange also called as Forex) OMS - Order Management system can be evaluated and proposal can be given on implementing FIX protocol at infrastructure level and at code level 29) Give details on Municipal Notes :- Municipal Notes are short-term instruments. The duration is six months or less and they are discounted instruments.Notes are issued for interim funding in anticipation of collecting taxes called Tax Anticipation Notes (TANS). 30) Give details on Corporate Bonds And Notes :- Corporations borrow long term capital through debt instruments known as bonds. Corporations borrow intermediate term financing through notes. Corporations borrow short term financing through commercial loans. Corporations borrow using short term instruments like commercial papers. 31) What is FOREX/FX Trading Cross Currencies? Currency pairs that don't involve USD at all are called cross currencies. One foreign currency is traded for another without having to first exchange the currencies into American dollars 32) What is Atlas Options ? Atlas options is a type of equity-based exotic option from the family of mountain range options. Atlas options have a payout that is based on the performance of the underlying securities, which comprise stocks. At maturity, some of the best- and worst-performing stocks are removed from this group of underlying securities, at which point the payout is calculated on the remainder of the securities Street Side Transaction - Street Side Transaction is the movement of security from seller to buyer and movement of payment from buyer to seller Automated Clearing House - ACH is an electronic funds-transfer system run by the National Automated Clearing House Association. This payment system deals with payroll, direct deposit, tax refunds, consumer bills, tax payment, and many more payment services 33) What is RANS BANS PNS ? RANS - Revenue Anticipation Notes issued in anticipation of revenues from bridges,tolls etc. BANS - Bond Anticipation Notes. They are offered before new bond offering to the market. PNS - Project Notes. Issued for major projects 34) Give details on Capital asset pricing model CAPM explained in detail :- CAPM the capital asset pricing model has the following underlying assumptions: 1) Investors are risk averse 2) Investors seek to maximize the expected utility of their wealth at the end of the period 3) Investors consider only first two moments(mean/expected return,variance) when choosing their portfolios 4) Investors only consider one investment period. This is the same for all investors 5) Investors have an unlimited capacity to borrow and lend at the risk-free rate 6) Information is accessible cost-free. Information is available simultaneously to all the investors. So, all the investors will have the same forecast return, variance, covariance expectations for all assets 7) Markets are perfect. There are no taxes, no transaction costs 8) All assets are traded and infinitely divisible 35) What are derivatives? Derivatives are a special category of investment banking instruments called as alternative investments. Derivatives derive their value from the underlying security. They have finite, predefined life, predefined reference rate, predefined reference price, predefined notional amount. They are not issued to raise capital. In most of the cases derivatives are used for arbitrage. 36) What is Two And Twenty Hedge Fund Compensation? Two and twenty compensation is a type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. More specifically, this phrase refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned. 37) Give details on Binary Option :- Binary Option is a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money.These types of options are different from plain vanilla options Also sometimes referred to as "all-or-nothing options" or "digital options". 38) Give details on Blue Sky Law Law governing Securities :- Blue Sky Law is the security regulation.When trade happens in different states, each and every state has its own securities (stocks/bonds - financial instruments) regulation.These regulations are drawn from the blue sky law.Blue sky law is a comprehensive set of laws governing the securities. Information on who has the authority to deal with violation issues has been clearly mentioned by Uniform Securities Act (USA) in these laws. Power of each state administrator is also mentioned in this law.This is a measure to protect investors. Sellers who are ready to sell their financial offerings must abide by this law. They need to provide information (financial details) which is reviewed and approved by the state administrator. This is a security measure against investment fraud.If the application of seller is not approved by state administrator, it needs a review. 39) What is Terms of futures contract? Quality of underlying asset Contract size (Ex: Grain contract = 5000 Bushels) Delivery location Delivery time (Ex: December corn contract) Settlement of some contracts = Future prices – Market price Price quotation and tick size Daily price limits Position limits Major components of a Broker Dealer is given below : 1) Front office - trading departments, investment banking, mergers and acquisitions, R&D, stock brokers, sales management 2) Middle office - Order control 3) Back office - control operations In some organizations middle office and back office are integrated into one entity. 40) What does Buck The Trend mean? When a security or a class of assets sees its market-driven price move in the opposite direction of the broad market or its competition. The move could be in either direction, but generally occurs as a result of good performance in the face of negative broad market performance.The meaning is often extrapolated out from just asset prices to business and market fluctuations. If a company is recording increased sales while its competitors lose business, that company would be "bucking the trend". 41) What is NYSE Affirmative Obligation? Affirmative obligation is an obligation of Newyork Stock Exchange (NYSE) specialists to enter the market on a particular security (either by posting or bidding and ask) when there is not sufficient market demand and supply to efficiently match orders. It is a New York Stock Exchange rule that governs the behavior of specialists. Affirmative obligation is the mandate of the specialists to step in and act as either the buyer or the seller when public investor orders exist do not match up naturally. It is also known as positive_obligation. 42) What is Forex/FX Base Currency? Base currency is the first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency.For accounting purposes, a firm may use the base currency to represent all profits and losses. It is sometimes referred to as the "primary currency". Example for Base currency : EUR/USD First currency listed is the base currency. The value of base currency is always 1.In FOREX markets usually US Dollar is considered the base currency. There are three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before. In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening. Negative Obligation - Opposite to affirmative obligation/positive obligation: Negative obligation is a New York Stock Exchange rule that governs the behavior of specialists. Negative obligation is the mandate of the specialists not trade for the specialist's firm's own account when enough public investor orders exist to match up naturally -- without intervention.It is opposite to affimative or positive obligation. 43) What is SRO ? SRO (Self-regulatory Organization) is an industry. This organization is empowered to oversee, regulate and when necessary take punitive action against brokers/dealers or their employees. Some examples of SRO include NYSE (New York Stock Exchange), NASD (national Association Of Security Dealers). 44) What is Fixed income bond 30 years? Fixed Income Bond 30-Year Treasury is a U.S. Treasury debt obligation that has a maturity of 30 years.The 30-year Treasury used to be the bellwether U.S. bond.Now 10-year Treasury is considered to be the benchmark. Treasury Bond is also called as T-bond or long bond.It will have maturity of twenty to thirty years. The U.S. Federal government stopped issuing the well-known 30-year Treasury bonds/long bonds for a four and a half year period starting October 31, 2001 and concluding February 2006. U.S Federal government is now issuing 30-year treasury bond quarterly. 45) When do companies go public? What is the perfect time to start IPO(Initial Public Offering)? A company or an organization can go public/start their IPO(Initial public offering) after gaining sufficient reputation. Aninvestor will look at the business model, previous performance of the organization, scope of their future projects before making a final decision on investing in the company's stock. FOREX Market - Purchasing Power Parity (PPP): Similar goods in different currency areas ahould be worth the same when FOREX valuations are taken into account.Foreign exchange values should be adjusted to bring their values inline Stock market vs futures market: Primary purpose of stock markets is to raise capital for the companies. Primary purpose of futures market is to hedge the price risk of companies and individual investors. National Association Of Security Dealers Automated Quotation(NASDAQ) Order Routing Systems are the electronic systems used by NASDAQ brokers/dealers : 1) SOES – Small Order Execution System 2) ACES – Advanced Computerized Execution System 3) CAES – Computer Assisted Execution Systems Options - Non-linear derivative: Option is a kind of non-linear derivative.Options are traded both in exchanges and over-the-counter (OTC). There are two types of options : 1) Call Option 2) Put Option Call option gives the holder the right to buy the underlying asset at a specified price at a specified date. Put option gives the holder the right to sell the underlying asset at a specified price at a specified date. The price in the contract is known as strike price or the exercise price. The date mentioned in the contract is known as expiration date or maturity. 46) Give details on pricing models in investment banking terms :- As per risk glossary most financial engineering models are what are known as relative pricing models. They price instruments based on prices of other instruments quoted in the market—an instrument's price is determined relative to other prices quoted in the market. Financial theorists and economists often use what are known as absolute pricing models. These price instruments without regard for other prices quoted in the market. Instead, they base prices on economic theory, assumptions about the preferences of economic agents, supply and demand, etc. Most absolute pricing models are what are known as equilibrium pricing models. They calculate at what prices a market will reach equilibrium—where supply and demand balance and the market clears. A shortcoming of many equilibrium models is the fact that they cannot be calibrated to current market prices. They calculate hypothetical equilibrium prices that generally don't match actual prices currently observed in the market. Because this violates the law of one price, such models are useless in a trading context. Equilibrium models are largely theoretical tools. Sharpe's capital asset pricing model is an equilibrium pricing model. Most relative pricing models employed by financial engineers are based on the theory of arbitrage-free pricing. Prices are determined relative to other prices quoted in the market in such a manner as to preclude any arbitrage opportunities. An arbitrage condition is a relationship that must prevail between certain prices if they are to be arbitrage-free. Examples of arbitrage conditions are: interest rate parity for forward exchange rates; put-call parity for European options; cash-and-carry arbitrage conditions for forward commodity prices. 47) What is arbitrage free pricing? With arbitrage-free pricing, financial engineers apply arbitrage conditions to prices that are observable in the market in order to determine other prices that are not. Standard formulas for pricing forwards, swaps and debt instruments are all derived using such arbitrage arguments. In complete markets, arbitrage-free pricing can be used to uniquely determine a price for any instrument. In incomplete markets, it may only place bounds on certain prices. The groundbreaking Black-Scholes (1973) approach to pricing options is based on arbitrage-free pricing. Black and Scholes identified an arbitrage condition that, given certain simplifying assumptions, must hold between the price of an option and the value of a corresponding replicating portfolio. Based upon this, they were able to price options. That same approach, modified in many different ways, underlies essentially all models used today for pricing options and other derivative instruments in complete markets. In essence, much of financial engineering is little more than aggressive and creative use of arbitrage-free pricing. 48) Give details on Investment Banking Security:- In investment banking terminology security is the receipt issued to the buyers while the company goes public via process called Initial Public Offering (IPO) and start raising capital from the public. The buyer has rights on the company, its assets and he is usually referred to as shareholder/stakeholder. Depending on the number of units of security and worth of it, the buyer is called Primary stakeholder, secondary stakeholder etc. 49) Give details on Coupon Rate:- Coupon Rate is the rate at which bond was issued. 50) What is Clearing Price in FOREX Trading? The specified monetary value assigned to a security or asset. This price is determined by the bid and ask process of buyers and sellers interested in trading the security. 51) Can you explain in detail about Commercial mortgage backed securities indexes CMBS ? A group of indexes made up of 25 tranches of commercial mortgage-backed securities (CMBS), each with different credit ratings. The CMBX indexes are the first attempt at letting participants trade risks that closely resemble the current credit health of the commercial mortgage market by investing in credit default swaps, which put specific interest rate spreads on each risk class. The pricing is based on the spreads themselves rather than on a pricing mechanism. Daily trading involves cash settlements between the two parties to any transaction, and the CMBX indexes are rolled over every six months to bring in new securities and continuously reflect the current health of the commercial mortgage markets. This “pay as you go” settlement process considers three events in the underlying securities as “credit events”: principal write downs, principal shortfalls (failures to pay on an underlying mortgage) and interest shortfalls (when current cash flows pay less than the CMBX coupon) 52) Can you explain Basel committee retail exposure ? Basel committee is the international body that governs the banking regulations.As per basel committee retail exposure is a homogenous portfolio, that consists of: 1) Large number of small, low-value loans 2) Has either consumer or business focus 3) Incremental risk of single exposure is small 53) Give examples of some retail exposures :- Some very good examples of retail exposures include : 1) Credit Cards 2) Personal finance loans, educational loans, auto loans, leasing 3) Revolving credits like bank overdraft, home equity line of credit 4) Residential mortgages 5) Small business loans less than 1 million euro 54) Give details on Sarbanex-Oxley SOX Act 2002 :- Sarbanex-Oxley SOX Act 2002, is an act from U.S government as a measure towards restoring the public confidence in publicly listed companies.It was in 2002 that bankruptcy of three major corporations Enron, Worldcom, Global Crossing happened. So, it was felt that there should be some legislation auditing the function of companies listed publicly in U.S.A.As a measure SOX legislation was formulated.It focusses on improving the structure for corporate governance and control.SOX act comprises of the following key provisions: 1) Creation of a new regulator 2) Certification by CEO's and CFO's 3) Ban on non-audit consulting services 4) Independence of audit committee Operational risk framework of an organization can be built upon the principles published in Basel in February, 2003. In this article organization refers to banks. 1) Board Approval - Operational risk should be defined and approved. Board of directors should be aware of the major aspects of the bank's operational risk. Operational risk should be categorized as a distinct risk category and should be managed. Framework should provide firm-wide definition of operational risk (enterprise risk management). Just like risk management in project management, operational risk should be identified, assessed (quantified), monitored and controlled(unavoidable)/mitigated(effect can be reduced). 2) Independent internal audit - Firms operational risk framework should be subjected to effective and comprehensive internal audit by well trained competent staff. Board of directors should make this a practice. It should be noted that audit team is not responsible for the operational risk management. IT is the direct responsibility of Board of directors. 3) Management implementation - Senior management is responsible for implementing operational risk management framework. It should be approved by the board of directors. The framework should be implemented taking firmwide risk management into consideration. It should be implemented in a consistent fashion and all staff should be aware of their responsibility towards operational risk management. In addition, Senior management is responsible for developing policies, procedures, processes for managing operational risk in all of the banks products (credit loans), activities(credit, debit,transaction processing,overdraft,loan,structured financing), processes (CMM, SOXimplementation), systems(IT,depratments) 4) Risk identification and assessment - Risks in existing material products, activities,processes,systems should be identified. When planning for a new material product,process, activity, system it is responsibility of senior management to identify risks and create risk management plan which will be subsidiary plan of project management plan. It should be approved by board of directors. Risks should be identified and assesses subsequently. 5) Risk monitoring and reporting - Processes and systems should be implemented to monitor and report risk on a regular basis and senior managers and board of directors should be given this information so that they can make proactive decisions. In many corporations VaR (Value At Risk) has been used as a standard metric to measure risk. It is computed based on certain mathematical models. Recent September 2008 crash cases show that regular meetings to discuss status in addition to VaR metrics will be the best risk management tool. Goldman Sachs followed this procedure and they were able to withstand the crisis. 6) Risk mitigation and control Policies and procedures should be formulated and implemented to control/mitigate operational risk. Risk profiles should be created and reviewed on a regular basis. Periodic review of risk limitation and control strategies is needed. 7) Contingency and continuity planning - Contingency reserve in Project management terms is the amount set aside to meet known risks. Contingency plans and business continuity plans(BCP) should be well documented and set in place to ensure effective functioning of existing systems and limit losses in case of crisis. 8) Disclosure - Sufficient public disclosure is needed. This allows the market participant to assess their approach to operational risk management 55) Give details on Operational Risk and Sarbanes Oxley SOX 404 Principles applicability :- Corporate firms operate under complex systems and processes. There are many instances wherein the system can fail. Risk associated with failure of system and people as a whole/ failure of people and systems is generally categorized as operational risk.In general, any risk other than market risk and credit risk is an operational risk. Operational risk framework of an organization can be built upon the principles published in Basel in February, 2003. In this article organization refers to banks. 1) Board Approval - Operational risk should be defined and approved. Board of directors should be aware of the major aspects of the bank's operational risk. Operational risk should be categorized as a distinct risk category and should be managed. Framework should provide firm-wide definition of operational risk (enterprise risk management). Just like risk management in project management, operational risk should be identified, assessed (quantified), monitored and controlled(unavoidable)/mitigated(effect can be reduced). 2) Independent internal audit - Firms operational risk framework should be subjected to effective and comprehensive internal audit by well trained competent staff. Board of directors should make this a practice. It should be noted that audit team is not responsible for the operational risk management. IT is the direct responsibility of Board of directors. 3) Management implementation - Senior management is responsible for implementing operational risk management framework. It should be approved by the board of directors. The framework should be implemented taking firmwide risk management into consideration. It should be implemented in a consistent fashion and all staff should be aware of their responsibility towards operational risk management. In addition, Senior management is responsible for developing policies, procedures, processes for managing operational risk in all of the banks products (credit loans), activities(credit, debit,transaction processing,overdraft,loan,structured financing), processes (CMM, SOXimplementation), systems(IT,depratments) 4) Risk identification and assessment - Risks in existing material products, activities,processes,systems should be identified. When planning for a new material product,process, activity, system it is responsibility of senior management to identify risks and create risk management plan which will be subsidiary plan of project management plan. It should be approved by board of directors. Risks should be identified and assesses subsequently 5) Risk monitoring and reporting - Processes and systems should be implemented to monitor and report risk on a regular basis and senior managers and board of directors should be given this information so that they can make proactive decisions. In many corporations VaR (Value At Risk) has been used as a standard metric to measure risk. It is computed based on certain mathematical models. Recent September 2008 crash cases show that regular meetings to discuss status in addition to VaR metrics will be the best risk management tool. Goldman Sachs followed this procedure and they were able to withstand the crisis 6) Risk mitigation and control Policies and procedures should be formulated and implemented to control/mitigate operational risk. Risk profiles should be created and reviewed on a regular basis. Periodic review of risk limitation and control strategies is needed 7) Contingency and continuity planning - Contingency reserve in Project management terms is the amount set aside to meet known risks. Contingency plans and business continuity plans(BCP) should be well documented and set in place to ensure effective functioning of existing systems and limit losses in case of crisis 8) Disclosure - Sufficient public disclosure is needed. This allows the market participant to assess their approach to operational risk management 54) What is definition of risk? Risk management starts with definition of the term risk. So, what does the terminology risk really mean? Risk is something unexpected. To put it in simple terms it refers to variables. A variable can never be constant 1) Business Risk -Variables include factors internal and external to business - competition. market positioning, brand (yes brand is also at risk and business needs to maintain the quality at all time), economy, strategy to name a few 2) Project - Any project has risk as its internal component and has risk management team to handle project risk to meet deadlines and deliver the agreed upon product/service 3) Financial Risk - Any factors that will cause unexpected swings in price of a commodity, product, service, markets, operations etc that have a financial impact is said to be a financial risk. Finance runs on major concepts like asset , liability, earning, spending,budget etc. Hence unexpected variation in asset valuation/earning is found to pose financial risk 55) Give details on some future contract terms definition :- Short futures position - Seller of futures contract has short futures position Long futures position - Buyer of futures contract has long futures position Clearing house - Takes opposite side of transaction. It is the regulatory authority of the exchange. Tick size - Minimum price of fluctuations of the contact Margin - Is cash or highly liquid collateral placed in an account to ensure that any trading losses will be met. Marking to market - Daily procedure of adjusting the margin account of balance for daily movements in futures price. Initial Margin - Amount required to open a futures position Maintenance Margin - Minimum margin account balance required to retain futures position(Short of long position) Margin call - Is made when margin account balance is less than the maintenance margin 56) Give details on Corporate Bond And Notes:- Corporations borrow long term capital through debt instruments known as bonds.Corporations borrow intermediate term financing through notes.Corporations borrow short term financing through commercial loans. Corporations borrow using short term instruments like commercial papers. Amend The Broker Dealer (BD): The license of brokers/dealers must change upon change of entity mix change. This is referred to as "Amend The Broker Dealer (BD)". 57) What a derivative contract is and how it differs from security? Derivatives are Used in financial risk management to hedge/manage risk Loses from one side of the transaction is equal to the gain in the other end Have predefined life, notional amount, predefined price Derives value from underlying security (Ex: stocks, bonds) Mostly used as a hedging strategy in financial markets Securities: Issued to raise capital for a firm financial needs Normally issued by firm to generate cash for firm future growth activities Underwriters (Ex: JP Morgan Chase, Lehman Brothers) normally issue securities There is a possibility that security value might become nil in the near future Examples of security include stocks, bonds Stock markets (Ex: New York Stock Exchange, NASDAQ, London Stock Exchange) trade on securities Securities can be issued by individual firms, corporations, federal and state governments 58) How to Relate Significant market events of the past several decades to the growth of risk management industry? Several significant events have occurred in the past that has affected the common man, financial institutions and business that has led to huge financial loses. Some of the significant events in the past are as follows: Black Monday of 1987 that saw a sharp decline in U.S stock price for a single day Asian equity markets decimation of 1997 Russian default of 1998 2001 September world trade attack Sub mortgage crisis that started on 2007 and whose impact is felt even today These events remind us that it is even more important to use financial risk management policies and practices to insulate ourselves from future financial