What FRM Part 1 Valuation & Risk Models actually tests
Valuation and Risk Models is 30% of the Part 1 exam:
| Area | What it covers |
|---|---|
| Value at Risk (VaR) | Parametric, historical simulation, Monte Carlo methods |
| Expected Shortfall | Definition, advantages over VaR, regulatory context (Basel III) |
| Backtesting | Kupiec test, Basel traffic-light framework |
| Bond Valuation & Duration | YTM, spot/forward rates, Macaulay/modified duration, convexity |
| Options Pricing | Black-Scholes-Merton, binomial model, put-call parity |
| Options Greeks | Delta, gamma, theta, vega, rho, delta hedging |
| Volatility Surfaces | Implied volatility, smile, skew |
| Credit Risk Fundamentals | Default probability, loss given default, structural models (Merton) |
Why this topic is the exam's center of gravity
Valuation and Risk Models is where the quant tools from earlier topics (probability distributions, regression) and the instruments from Financial Markets & Products (bonds, options) converge into the actual risk-management output — a VaR number, a duration figure, a Greek. It's tested heavily because it's genuinely the connective tissue of the whole Part 1 syllabus.
Sample question: Parametric VaR
A portfolio has a daily standard deviation of $500,000. Using the parametric (delta-normal) method, what is the 1-day 99% VaR? (z = 2.33 for 99% confidence)
Parametric VaR = z × σ = 2.33 × $500,000 = $1,165,000. This assumes returns are normally distributed and the portfolio has no significant options/nonlinear exposure — for portfolios with meaningful optionality, historical simulation or Monte Carlo VaR is more appropriate than the parametric method.
The 2026 Valuation and Risk Models syllabus, reading by reading
Pinnacle runs on a syllabus graph — named readings with explicit prerequisites, each one mapped against GARP's official 2026 FRM Study Guide. It is the same map the free diagnostic reasons over, not a marketing summary of it. These are the eight confirmed Valuation and Risk Models readings, and what each one covers:
Bond Pricing & Yields
Pricing conventions, discounting and the no-arbitrage argument — full and flat price; spot, forward and par rates; compounding conventions; and bond yield and return calculations.
Duration & Convexity
Macaulay duration, dollar duration and DV01 applied to price sensitivity; convexity measured and used alongside duration; modelling non-parallel term structure shifts; and hedging on both measures.
Value at Risk Foundations
The measurement frameworks — mean-variance, VaR, expected shortfall; VaR's concept, confidence levels and holding periods; and calculating and applying VaR and ES.
Option Valuation
Option valuation with binomial trees — risk-neutral valuation, American versus European options — and the Black-Scholes-Merton model: assumptions, formula, inputs.
Greeks & Hedging
Delta, gamma, theta, vega and rho — definitions, interpretation, use in hedging — plus delta hedging, gamma scalping, and applications of options for risk management.
Measuring Credit Risk
Expected loss and unexpected loss for individual assets and portfolios; default risk models — the Gaussian copula, the Vasicek model, CreditMetrics; and economic versus regulatory capital.
Country & Sovereign Risk
The specific sources country risk arises from and the measures used to assess it, plus the use of external ratings in assessing sovereign default risk.
Stress Testing
Why stress testing matters, its applications, the practices firms follow, and scenario analysis.
Every practice question in the bank is tagged to one of these readings — which is how the diagnostic can name the specific concept underneath a wrong answer, not just the topic area it sat in.
Reading names follow GARP's published 2026 FRM Study Guide, referenced for accuracy. Pinnacle is an independent adaptive learning platform. FRM® is a registered trademark of the Global Association of Risk Professionals (GARP). Pinnacle is not affiliated with, endorsed by, or connected to that organisation.