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Exam FM is a three-hour, multiple-choice examination that is administered by Preliminary Actuarial Examinations/SOA and is identical to CAS Exam 2. The examination is jointly sponsored and administered by the CAS, SOA, and the Canadian Institute of Actuaries (CIA). The examination is also jointly sponsored by the American Academy of Actuaries (AAA) and the Conference of Consulting Actuaries (CCA). Exam FM is administered as a computer-based test. For additional details, please refer to “ComputerBased Testing Rules and Procedures” (http://www.beanactuary.org/exams/cbt.cfm ). The goal of the syllabus for this examination is to provide an understanding of the fundamental concepts of financial mathematics, and how those concepts are applied in calculating present and accumulated values for various streams of cash flows as a basis for future use in: reserving, valuation, pricing, asset/liability management, investment income, capital budgeting, and valuing contingent cash flows. The candidate will also be given an introduction to financial instruments, including derivatives, and the concept of no-arbitrage as it relates to financial mathematics. Exam FM assumes a basic knowledge of calculus and an introductory knowledge of probability. The following learning objectives are presented with the understanding that candidates are allowed to use specified calculators on the exam. The education and examination of candidates reflects that fact. In particular, such calculators eliminate the need for candidates to learn and be examined on certain mathematical methods of approximation. Please check the Updates section on this exam's home page for any changes to the exam or syllabus.
I. Interest Theory A. Time Value of Money 1. The candidate will be able to define and recognize the definitions of the following terms: a. Interest rate (rate of interest) b. Simple interest c. Compound interest d. Accumulation function e. Future value f. Present value/net present value g. Discount factor h. Discount rate (rate of discount) i. Convertible m-thly j. Nominal rate k. Effective rate l. Force of interest m. Equation of value
payable m-thly. Annuities with payments that are not contingent 1. Bonds 1. and any three of present value. Yield rate g. future value. D. Payable m-thly e. future value. c. immediate (or due). Calculate the amount of interest and principal repayment in a given payment. C. d. calculate all of the other items. Annuity-immediate b. Coupon rate e. Final payment (drop payment. Term of bond f. Level payment annuity f. interest rate. the effective discount rate. Term of annuity 2. the nominal discount rate convertible m-thly. except one. or future value. payment amounts. The candidate will be able to define and recognize the definitions of the following terms: a. Outstanding balance e. b. Interest c. Given an annuity with non-level payments. payment period. calculate the third based on simple or compound interest. Arithmetic increasing/decreasing payment annuity g. Redemption value c. Par Value/Face value d. or the force of interest. c. Term of loan d. immediate (or due). Geometric increasing/decreasing payment annuity h. calculate the remaining items. Sinking fund 2. Given an annuity with level payments. interest rate. payment. interest rate. in a sinking fund arrangement calculate the missing quantity. and any three of present value. The candidate will be able to: a. The candidate will be able to define and recognize the definitions of the following terms: a. balloon payment) f. and term of annuity calculate the remaining two items. the pattern of payment amounts. Loans 1. Price b. Principal b. Given any one of the effective interest rate. and term calculate the remaining two items. payment amount. Amortization g. principal. Calculate the outstanding balance at any point in time. Coupon. The candidate will be able to: a. The candidate will be able to: a. Given the quantities. present value. Callable/non-callable .2. Perpetuity d. payable m-thly. B. Given any four of term of loan. b. b. Annuity-due c. Given any two of interest rate. the nominal interest rate convertible m-thly. Write the equation of value given a set of cash flows and an interest rate. The candidate will be able to define and recognize the definitions of the following terms: a.
Bid-ask spread c. Dollar-weighted rate of return/Time-weighted rate of return c. Financial Economics A. and term of bond. 2. The candidate will be able to define and recognize the definitions of the following terms: a. Net profit/payoff g. Calculate the duration and convexity of a set of cash flows. Accumulation of discount 2. Over-the-counter market b. II. Construct an investment portfolio to match present value and duration of a set of liability cash flows. Yield rate/rate of return b. e. Calculate the price of a stock using the dividend discount model. The candidate will be able to define and recognize the definitions of the following terms: a. f. c. Portfolio g. g. Marking-to-market . Credit risk h. Stock index e. Construct an investment portfolio to fully immunize a set of liability cash flows. Short position. The candidate will be able to: a. Current value d. d. Book value i. Forward rate i. General Cash Flows and Portfolios 1. Spot rate h. Immunization (including full immunization). Ask price. Use duration and convexity to approximate the change in present value due to a change in interest rate. Bid price. coupon rate. b. Calculate the dollar-weighted and time-weighted rate of return. Convexity f. Given any four of price. Immunization 1. Calculate either Macaulay or modified duration given the other. Calculate the portfolio yield rate. The candidate will be able to define and recognize the definitions of the following terms: a. Stock price. The candidate will be able to: a. redemption value. Redington immunization.h. Long position d. c. F. The candidate will be able to: a. Yield curve j. Derivative. Underlying asset. Spot price f. c. Calculate the current value of a set of cash flows. stock dividend 2. E. Construct an investment portfolio to exactly match a set of liability cash flows. yield rate. b. Short selling. calculate the remaining item. General Derivatives 1. Duration (Macaulay and modified) e. Cash-flow matching. b.
Strike price/Exercise price d. Synthetic forwards c. B. Maintenance margin. Put option b. Margin call 2. European option. c. box. Expiration. Out-of-the-money f. Put-call parity 2. Use the concept of no-arbitrage to determine the theoretical value of futures and forwards. forward price. The candidate will be able to: a. The candidate will be able to evaluate an investor's margin position based on changes in asset values. The candidate will be able to define and recognize the definitions of the following terms: a. Dividends h. Swap term. calculate the remaining item using the put-call parity formula. Prepaid swap b. Forwards and Futures 1. Collars (including zero-cost collars). Expiration date c. bear. Hedging and Investment Strategies 1. Cost of carry e. Spreads (including bull. Explain the relationship between forward price and futures price. Swap. Margin. Explain how derivative securities can be used as tools to manage financial risk. At-the-money. d. Swap spread. Arbitrage b. Naked writing g. Lease rate f. written straddles and butterfly spreads) f. Bermudan option e. Nondiversifiable risk c. b. C. American option. Explain the reasons to hedge and not to hedge. The candidate will be able to define and recognize the definitions of the following terms: a. Options 1. In-the-money. Determine forward price from prepaid forward price. Forward contract. Given any four of call premium. c. E. The candidate will be able to define and recognize the definitions of the following terms: a. Convertible bond. Explain the relationship between forward price and future stock price. Futures contract 2. The candidate will be able to evaluate the payoff and profit of basic derivative contracts. Swaps 1. put premium. Evaluate the payoff and profit of hedging strategies. Hedging. and ratio spreads) d. The candidate will be able to define and recognize the definitions of the following terms: a. Paylater strategy e. Diversifiable risk. Notional Amount . Covered call. Fully leveraged purchase c. The candidate will be able to: a. strike price and interest rate. Straddles (including strangles. Call option. Outright purchase. Implied repo rate d. Mandatorily convertible bond 2. D. b.i. e. Prepaid forward contract b.
3) Chapter 9 (9.2 and 2.9.1-18.104.22.168) Chapter 2 (2. 6. 8.2-4.2-2.1. Interest Theory There is not a single textbook required for the learning objectives in Section I. .13) Chapter 4 (4. excluding 3.1 -2.2) Chapter 8 (8.F.2-5.2.2-3.1-4.1-7.. Mathematics of Investment and Credit (Fourth Edition). Suggested Textbooks for Learning Objectives in Section I.1 and 8.1) Chapter 8 (22.214.171.124 excluding 2.1-6. 3. Interest rate swap d.2-6. ACTEX Publications: Chapter 1 (1. Broverman.2) Chapter 6 (6.2) Chapter 7 (7..1 and 3.4 and 5.A.6.3-1. The same chapter references apply. whichever of the source textbooks candidates choose to use.W.3) Chapter 3 (3.1-5. 1.5) Note: Candidates may also use the First Edition of Mathematical Interest Theory (Publisher: Prentice Hall). Simple commodity swap. Text References for Exam FM Knowledge and understanding of the financial mathematics concepts are significantly enhanced through working out problems based on those concepts. Deferred swap 2.6) Chapter 5 (5. 2008.. Thus.3 excluding 5. 2009. S. Not all topics may be covered at the same level in each text.c.1-1. The Mathematical Association of America: Chapter 1 (1.J.3. The candidate will be able to use the concept of no-arbitrage to determine the theoretical values of swaps. candidates are encouraged to work out the textbook exercises related to the listed readings.1-126.96.36.199.1.2) Daniel.7) Chapter 3 (3. 3.14) Chapter 2 (2.3 excluding 188.8.131.52. The candidate may wish to use one or more texts in his/her preparation for the examination.2) Chapter 4 (4.9) Chapter 7 (7. Mathematical Interest Theory (Second Edition). J. The texts listed below are representative of the textbooks available to cover the material on which the candidate may be tested.1–8.1) Chapter 5 (5. L. in preparing for the Financial Mathematics exam.4) Chapter 6 (6. and Vaaler.
10) Chapter 2 (2.8) Chapter 4 (4.7) Chapter 9 (9.1-1.G. since 2000.Kellison.. McDonald http://www.9) Chapter 8 (8. J.1-3.7) Chapter 7 (7.1-7. by R.html Notation and terminology used for Exam FM/ Exam 2 All released exam papers..1.9) Chapter 5 (5.1-3.1-8. Derivatives Markets (Second Edition).4 and Appendix 5.2-6. BPP Professional Education: Chapter 1 Chapter 2 Chapter 3 (3.4) Chapter 5 (5.7.1-4.L.6 and Appendix 2.northwestern. can be found here.5) Chapter 11 (11.A) Chapter 3 (3.1-4.edu/faculty/mcdonald/htm/typos2e.10) Chapter 7 (7.1-6. 2005.kellogg.3 excluding 6.4) Chapter 10 (10.2). C. OTHER RESOURCES: Derivatives Markets.6) Chapter 6 (6. R. 6.4) Chapter 2 (2.3) Textbook for Learning Objectives in Section II.2-3.2-4. Errata.1. The Theory of Interest (Third Edition).8) Ruckman.6-6.3-2. 2006 Second Edition. Irwin/McGraw-Hill: Chapter 1 (1. Financial Economics McDonald.B) Chapter 8 (8. 2008.2-11. Exam FM Sample Questions and Solutions Samples Questions and Solutions for Derivatives Markets Review of Calculator Functions for the Texas Instruments BA-35 Review of Calculator Functions for the Texas Instruments BA II Plus .2-10.1-2. Addison Wesley: Chapter 1 (1.2-1.1-5.2-7.1-8.6) Chapter 3 (3.5) Chapter 4 (4. 2006. and Francis.5) Chapter 5 Chapter 6 (6... S. Financial Mathematics: A Practical Guide for Actuaries and other Business Professionals (Second Edition).2-5.9) Chapter 4 (4.
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