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The Financial Mathematics exam is called Exam FM by the SOA and Exam 2 by the CAS. This three-hour exam consists of 35 multiple-choice questions. The examination is administered by Preliminary Actuarial Examinations/SOA. 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). The Financial Mathematics Exam is administered as a computer-based test. For additional details, please refer to Exam Rules 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. The Financial Mathematics Exam 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. The ranges of weights shown are intended to apply to the large majority of exams administered. On occasion, the weights of topics on an individual exam may fall outside the published range. Candidates should also recognize that some questions may cover multiple learning objectives. Each multiple-choice problem includes five answer choices identified by the letters A, B, C, D, and E, only one of which is correct. Candidates must indicate responses to each question on the computer. Candidates will be given three hours to complete the exam. As part of the computer-based testing process, a few pilot questions will be randomly placed in the exam (paper and pencil and computer-based forms). These pilot questions are included to judge their effectiveness for future exams, but they will NOT be used in the scoring of this exam. All other questions will be considered in the scoring. All unanswered questions are scored incorrect. Therefore, candidates should answer every question on the exam. There is no set requirement for the distribution of correct answers for the SOA/CAS/CIA multiple-choice preliminary examinations. It is possible that a particular answer choice could appear many times on an examination or not at all. Candidates are advised to answer each question to the best of their ability, independently from how they have answered other questions on the examination. Since the CBT exam will be offered over a period of a few days, each candidate will receive a test form composed of questions selected from a pool of questions. Statistical scaling methods are used to ensure within reasonable and practical limits that, during the same testing period of a few days, all forms of the

Nominal rate k. the effective discount rate. calculate all of the other items. Annuities with payments that are not contingent (5-20%) 1. payment amounts. Accumulation function e. LEARNING OBJECTIVES I. Given any two of interest rate. Annuity-immediate b. B. the nominal discount rate convertible m-thly. . or future value.test are comparable in content and passing criteria. The candidate will be able to define and recognize the definitions of the following terms: a. Geometric increasing/decreasing payment annuity h. Simple interest c. Arithmetic increasing/decreasing payment annuity g. Term of annuity 2. the pattern of payment amounts. payable m-thly. the nominal interest rate convertible m-thly. Interest rate (rate of interest) b. Interest Theory (65-80%) A. Inflation and real rate of interest m. calculate the third based on simple or compound interest. interest rate. present value. The candidate will be able to: a. Future value f. Time Value of Money (5-15%) 1. (or payable continuously). Convertible m-thly j. Force of interest n. Given an annuity with level payments. Annuity-due c. Perpetuity d. and any three of present value. Present value/net present value g. Level payment annuity f. future value. Discount factor h. The candidate will be able to define and recognize the definitions of the following terms: a. or the force of interest. Equation of value 2. interest rate. future value. payment. immediate (or due). Given any one of the effective interest rate. Effective rate l. b. Write the equation of value given a set of cash flows and an interest rate. and term calculate the remaining two items. The methodology that has been adopted is used by many credentialing programs that give multiple forms of an exam. and term of annuity calculate the remaining two items. Given an annuity with non-level payments. payable m-thly. (or payable continuously). Compound interest d. immediate (or due). b. c. Payable m-thly. The candidate will be able to: a. and any three of present value. Discount rate (rate of discount) i. or Payable continuously e.

payment period. except one. balloon payment) f. General Cash Flows and Portfolios (5-20%) 1. . Calculate the amount of interest and principal repayment in a given payment. The candidate will be able to define and recognize the definitions of the following terms: a. Forward rate i. b. Calculate the outstanding balance at any point in time. Par Value/Face value d.C. E. Dollar-weighted rate of return/Time-weighted rate of return c. and term of bond. calculate the remaining items. Spot rate h. Book value i. stock dividend 2. in a sinking fund arrangement calculate the missing quantity. Portfolio and investment year allocation methods g. Given the quantities. Final payment (drop payment. Coupon rate e. Coupon. The candidate will be able to: a. Term of loan d. Callable/non-callable h. calculate the remaining item. Given any four of term of loan. interest rate. The candidate will be able to define and recognize the definitions of the following terms: a. Principal b. The candidate will be able to: a. Bonds (5-20%) 1. Accumulation of discount/Amortization of premium 2. The candidate will be able to: a. d. modified and effective) e. Yield rate g. principal. Convexity f. yield rate. b. Stock price. Given any four of price. Loans (5-20%) 1. Redemption value c. Duration (Macaulay. The candidate will be able to define and recognize the definitions of the following terms: a. redemption value. Yield curve j. coupon rate. Interest c. D. Amortization g. Yield rate/rate of return b. Calculate the portfolio yield rate. Price b. Current value d. payment amount. Term of bond f. c. Sinking fund 2. Calculate the current value of a set of cash flows. Outstanding balance e.

The candidate will be able to define and recognize the definitions of the following terms: a. Ask price. Immunization (including full immunization). Short position. Dividends h. Bermudan option e. Calculate the duration and convexity of a set of cash flows. f. c. Over-the-counter market b. g. The candidate will be able to define and recognize the definitions of the following terms: a. Put option b. Calculate either Macaulay or modified duration given the other. Marking-to-market i.c. Bid price. At-the-money. Cash-flow matching. b. b. Options (5-10%) 1. Call option. Financial Economics (20-35%) A. The candidate will be able to: a. Put-call parity 2. Out-of-the-money f. Stock index e. Covered call. Hedging and Investment Strategies (5-15%) . European option. e. F. Naked writing g. 2. Expiration. d. Construct an investment portfolio to exactly match a set of liability cash flows. American option. Short selling. Expiration date c. Redington immunization. Long position d. Construct an investment portfolio to fully immunize a set of liability cash flows. In-the-money. c. Underlying asset. Net profit/payoff g. C. Bid-ask spread c. The candidate will be able to define and recognize the definitions of the following terms: a. Strike price/Exercise price d. The candidate will be able to evaluate an investor's margin position based on changes in asset values. Immunization (5-15%) 1. The candidate will be able to evaluate the payoff and profit of basic derivative contracts. Construct an investment portfolio to match present value and duration of a set of liability cash flows. Calculate the dollar-weighted and time-weighted rate of return. General Derivatives (0-5%) 1. Maintenance margin. II. Calculate the price of a stock using the dividend discount model. Derivative. Spot price f. Use duration and convexity to approximate the change in present value due to a change in interest rate. B. Margin. Credit risk h. Margin call 2.

Hedging. Arbitrage b. box. Straddles (including strangles. forward price. Implied repo rate d. Notional Amount c. Fully leveraged purchase c. e. The candidate will be able to: a. Synthetic forwards c. Nondiversifiable risk c. Explain how derivative securities can be used as tools to manage financial risk. Lease rate f. b. Forwards and Futures (0-10%) 1. Explain the relationship between forward price and futures price. Determine forward price from prepaid forward price. whichever of the source textbooks candidates choose to use. Thus. c. The candidate will be able to define and recognize the definitions of the following terms: a. written straddles and butterfly spreads) f. Swap spread. Forward contract. c. The candidate will be able to define and recognize the definitions of the following terms: a. Evaluate the payoff and profit of hedging strategies. in preparing for the Financial Mathematics exam. Swap. Prepaid forward contract b. Text References Knowledge and understanding of the financial mathematics concepts are significantly enhanced through working out problems based on those concepts. strike price and interest rate. Mandatorily convertible bond 2. The candidate will be able to use the concept of no-arbitrage to determine the theoretical values of swaps. Swaps (0-5%) 1. Given any four of call premium. candidates are encouraged to work out the textbook exercises related to the listed readings. Cost of carry e. Paylater strategy e. Outright purchase. D. Interest rate swap d. d. Spreads (including bull. Explain the reasons to hedge and not to hedge. and ratio spreads) d. Use the concept of no-arbitrage to determine the theoretical value of futures and forwards.1. Futures contract 2. calculate the remaining item using the put-call parity formula. The candidate will be able to: a. b. E. . Convertible bond. Diversifiable risk. Simple commodity swap. Prepaid swap b. Swap term. Deferred swap 2. put premium. The candidate will be able to define and recognize the definitions of the following terms: a. bear. Explain the relationship between forward price and future stock price. Collars (including zero-cost collars).

2009.10) Chapter 7 (7. S.3.6) Chapter 5 (5.J.3 excluding 5. 6.2 and 2.10) Chapter 2 (2.1-1. 1. and Vaaler..4. J.4.4. 6.1-9.4 excluding 2. Not all topics may be covered at the same level in each text..9.W.4. The texts listed below are representative of the textbooks available to cover the material on which the candidate may be tested. C.2-4.2-6. S.2.4) Chapter 6 (6. J.1-3.1) Chapter 8 (8. The candidate may wish to use one or more texts in his/her preparation for the examination.6) Chapter 6 (6. The same chapter references apply.2-1.1-4.1-7.. Interest Theory There is not a single textbook required for the learning objectives in Section I. The Mathematical Association of America: [Candidates may also use the First Edition of Mathematical Interest Theory (Publisher: Prentice Hall)..2) Chapter 4 (4. BPP Professional Education: Chapter 1 Chapter 2 Chapter 3 (3.5) Kellison. 2008.7) Chapter 2 (2.8) Chapter 4 (4.3) Chapter 3 (3.2-4.3. 2005.4) Chapter 10 (10.2-5.14) Chapter 2 (2. L.4 and 5.F.] Chapter 1 (1.2-2.6.2) Chapter 8 (8. 8.1 and 3.1–8.5) Chapter 11 (11. Mathematical Interest Theory (Second Edition). excluding 3.2-10. same chapters] Chapter 1 (1.2. Irwin/McGraw-Hill: Chapter 1 (1.9) Chapter 5 (5.2) Daniel.G. ACTEX Publications: [Candidates may also use Fifth Edition.2-5.3.6) Chapter 3 (3.2-3.2) Chapter 7 (7.1) Chapter 5 (5.2-7.3) Chapter 9 (9.2-11.. Broverman.1-6.9) Chapter 4 (4.7) .9) Chapter 7 (7.1 -2.7. and Francis.12.2) Chapter 6 (6.7) Chapter 9 (9.1.3-1.Suggested Textbooks for Learning Objectives in Section I.3 excluding 6.A.7) Chapter 3 (3.3-2.2-6. Financial Mathematics: A Practical Guide for Actuaries and other Business Professionals (Second Edition). The Theory of Interest (Third Edition). 3.1 and 8. 2008.8) Ruckman. 3.13) Chapter 4 (4.1-3.1-5.11.1-4. Mathematics of Investment and Credit (Fourth Edition).1.3.2-3..

R. 2006 Second Edition. since 2000.B) Chapter 8 (8. by R.L.5) Chapter 4 (4. Errata.A) Chapter 3 (3.1-3. can be found here. 2006.1-1.1-2.6 and Appendix 2.1-8..4) Chapter 2 (2. Financial Economics McDonald.1-7.1.4) Chapter 5 (5.Chapter 5 Chapter 6 (6.1-8.3 excluding 6.1-6.3) Textbook for Learning Objectives in Section II. Derivatives Markets (Second Edition).4 and Appendix 5.1-5.2).1. Addison Wesley: Chapter 1 (1. McDonald Notation and terminology used for Exam FM/Exam 2 All released exam papers. OTHER RESOURCES: Derivatives Markets.7) Chapter 7 (7.1-4.9) Chapter 8 (8.6-6. Exam FM/2 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 .

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