Exam F2FIE

F2FIE – Valuation and Financial Considerations is an exam of the finance, investments and ERM track of the Canadian Institute of Actuaries' Fellowship (FCIA) pathway.

About the exam

The aim of the Valuation and Financial Considerations exam is to develop a candidate’s expertise to a level that allows for analysis in major areas of the investment practice. It builds on material covered in the Financial Products exam and earlier subjects and seeks to equip a student with the skills and broad working understanding of financial and investment markets.

Exams are administered as an open-book, four-hour exam requiring analysis in the context of a problem and written responses to specific questions. Candidates will complete the exam through the CIA learning management system.

Learning Objectives

Principal terms (0%)

Define principal terms used in the investment and financial reporting environments. (A1)

Investment policy and governance (10%)

Compare and differentiate the interests of key stakeholders. (B4)

Identify and analyze principal versus agent conflict. (B4)

Describe and analyze sources of unethical conduct and explain the role of a fiduciary. (B4)

Describe and evaluate governance mechanisms that attempt to address these conflicts. (B5)

Understand and evaluate the importance of an organization’s culture in effectuating governance. (B5)

Explain and demonstrate how governance may be structured to gain competitive advantages and efficiencies. (C5)

Understand how ethics relate to business decision-making and relate ethics in business to personal ethics. (D5)

Demonstrate an understanding of the concept of investment beliefs, including their application, in the following areas: (D5)

Establishment of an investment policy.

Diversification and rebalancing.

Strategic vs. tactical allocation.

Geographic and sector allocation.

Currency management.

Liquidity management.

Credit policy.

Active vs. passive management.

Alternatives and derivatives limits.

Demonstrate understanding of regulators’ guidance and context for different approaches to responsible investment and specifically, the integration of environmental, social, and governance (ESG) factors in the investment process. (C3)

Demonstrate an understanding of and analyze the underlying issues that constitute factors within each of the ESG areas. (C4)

Demonstrate an understanding of and evaluate the ESG market: relevance, size, scope, key drivers and challenges, and risks and opportunities. (C5)

Asset allocation (15%)

Explain the impact of asset allocation relative to various investor goals and constraints, including the impact due to liability calculation, funding rules and regulations, and their results on the investor goals and attractiveness of different asset classes. (C2)

Propose and critique asset-allocation strategies. (D5)

Evaluate the significance of liabilities in the allocation of assets. (D5)

Explain the purpose and impact of financing and leverage in the allocation of assets. (C2)

Incorporate risk management principles in investment policy and strategy, including asset allocation. (C6)

Discuss strategic-implementation choices in asset allocation, including passive/active choices and vehicles for implementing passive and active mandates. (C3)

Discuss strategic considerations in rebalancing asset allocations. (D5)

Describe and critique the use of mean-variance optimization in asset allocation. (D5)

Equities (20%)

Explain the nature and role of equity investments within portfolios that may include other asset classes. (A2)

Understand and critique the basic concepts surrounding passive, active, and semi-active enhanced index equity investing as well as factor-based investing, including managing exposures. (B5)

Explain and critique the basic active equity selection strategies including value, growth, and combination approaches. (B5)

Understand and calculate equity indices and their construction, including distinguishing among the weighting schemes and their biases. (C3)

Identify and evaluate methods for establishing passive exposure to an equity market. (B5)

Compare and critique techniques for characterizing the investment style of an investor. (C5)

Recommend and justify, in a risk-return framework, the optimal portfolio allocations to a group of investment managers. (C5)

Describe and critique the core-satellite approach to portfolio construction with a completeness fund to control overall risk exposures. (B5)

Explain and critique alpha and beta separation as an approach to active management and demonstrate the use of portable alpha. (B5)

Describe and critique the process of identifying, selecting, contracting with, and overseeing equity managers. (B5)

Distinguish between active share and active risk and discuss how each measure relates to a manager’s investment strategy. (C5)

Advanced option pricing (20%)

Identify and differentiate the features of the classic short-rate models including the Vasicek and the Cox-Ingersoll-Ross models. (C4)

Understand and explain the terms “time-homogeneous models,” “affine-term structure models,” and “affine-coefficient models,” and explain their significance in the context of short-rate interest models. (D2)

Explain the dynamics of and motivation for the Hull-White extension of the Vasicek model. (D5)

Explain the features of the Black-Karasinski model. (B2)

Understand and explain the relationship between market-quoted caplet volatilities and model volatilities. (B2)

Explain how deterministic shifts can be used to fit any given interest rate term structure and demonstrate an understanding of the Cox-Ingersoll-Ross++ model. (C2)

Understand and explain the features of the G2++ model, including the motivation for more than one factor, calibration approaches, the pricing of bonds and options, and the model’s relationship to the two-factor Hull-White model. (C3)

Describe and apply models that account for negative interest rates, such as Black’s model and shifted log-normal. (C3)

Explain the concept of volatility smile and some arguments for its existence. (B5)

Calculate the hedge ratio for a call option given the dependency of the Black-Scholes volatility on the underlying asset. (C3)

Compare and contrast “floating” and “sticky” volatility smiles. (C4)

Calculate the risk-neutral density given call option prices. (C3)

Identify several stylized empirical facts about smiles in a variety of options markets. (B2)

Describe and contrast several approaches for modelling smiles, including stochastic volatility, local volatility, jump diffusions, variance gamma, and mixture models. (C4)

Describe and compare various issues and approaches for fitting a volatility surface. (C4)

Alternative assets (10%)

Understand and evaluate the types of alternative investments available in each market and their most important differences for an investor, like: (D5)

a. Real estate and infrastructure.

b. Agriculture and timberland.

c. Green assets.

d. Longevity bonds.

e. Insurance-linked securities (contingent convertibles, catastrophe bonds).

f. Hedge funds.

g. Venture capital.

h. Derivative contracts.

i. Private equity.

j. Private debt/credit.

Understand and calculate benchmarks available to evaluate the performance of alternative investment managers. (C3)

Describe the limitations of the benchmarks and evaluate how to circumvent these limitations. (B5)

Understand and evaluate investment strategies and portfolio roles as well as their specific construction/implementation nuances that are characteristic of each alternative investment. (D5)

Perform a due diligence and oversight processes and the impact of negotiated covenants on the risk-return profile for alternative investments. (C3)

Discuss how hedge-fund strategies may be classified and evaluate the impact of an allocation to a hedge-fund strategy in an investment portfolio. (C5)

Machine learning, neural networks, application of blockchain on insurance (10%)

Understand the defining features of blockchain technology, smart contracts, and components of blockchain. (B2)

Discuss the applications of cryptocurrency and blockchain for insurance use cases such as claims processing, reinsurance and swaps, tokenisations of insurance risk, and the decentralized use of data. (B5)

Describe and evaluate the stages, risks, and challenges to blockchain adoption. (C5)

Discuss examples and understand the characteristics of various supervised and unsupervised machine learning methods. (B4)

Describe and evaluate various key areas of machine learning practice for actuarial tasks - including model evaluation, generalisation error and model validation, feature scaling, regularisation, and feature engineering. (A5)

Distinguish between neural network, deep learning methods, and reinforcement learning. (B4)

Identify the steps required to process and analyze big data in relation to the Actuarial Control Cycle (ACC). (C2)

Discuss and understand the steps and objectives of data collection, data cleaning, and model validation. (C2)

Understand the application of data science considerations in the actuarial context. (D4).

Evaluate the fit of a machine learning algorithm and discuss the problem of model overfitting. (B4)

Financial reporting (15%)

Describe the basic features of a financial-reporting conceptual framework. (B2)

Explain and critique the key concepts in determining fair value. (B5)

Describe International Financial Reporting Standards (IFRS) 17. (B2)

Explain and apply the general concepts underlying specific U.S. accounting standards for asset reporting, valuing deferred acquisition cost assets, and valuing liabilities. (C6)

Apply the IFRS 17 general method approach, variable fee approach, or premium allocation approach to appropriately value liabilities for remaining coverage and for incurred claims. (C6)

Explain how liabilities are calculated under U.S. statutory reporting. (C6)

Explain the objectives and features of regulatory risk-based capital requirements. (B2)

Perform risk-based capital RBC calculations required by C3 Phase II. (C6)

Apply Life Insurance Capital Adequacy Test (LICAT) calculations and understand the components that form the LICAT ratio. (C6)

Source Material

Source Material

FCIA Syllabus – Finance, investments and ERM with option in Banking (CIA - 2024)

Exam F2FIE (pp. 8–11)