CM2: Economic Modelling (Completely in English)
For Institute and Faculty of Actuaries and Institute of Actuaries of India exams (erstwhile Financial Engineering & Loss Reserving).
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Unlike traditional coaching institutes, TAG courses are concept & intuition first – we'll get into the detail of math, intuition & derivations and solve a lot of exam questions.
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About CM2: Economic Modelling
Course Overview
The overall objective of CM2 is to teach the foundation of Asset-Liability Management (ALM) for an Insurance Company. You will learn the dual role of an actuary: managing liabilities well by maintaining adequate reserves (avoiding ruin) and managing the asset side by maximizing returns, minimizing investment risk, and mitigating interest rate risks through derivatives.
Real-World Applications & Jobs
- Traditional Jobs: Asset-Liability Management in Insurance Companies, and General Insurance (P&C) Reserving using Run-Off Triangles.
- Non-Traditional Jobs: Back-office and mid-office roles in Investment Banks (market risk modelling, credit risk modelling, model risk validation), as well as Quant roles in Credit Rating Agencies & Banks.
CM2 will not teach you how to trade in the stock market, nor will it cover Technical Analysis or Fundamental Analysis of security prices.
Course Prerequisites & Related Subjects
CM2 builds heavily upon several core foundational concepts covered in prior papers:
- CS1: Random Variables
- CM1: Present Values (PV), Accumulated Values (AV), and the Term Structure of Interest Rates
- CS2: Stochastic Processes
- CB2: Microeconomic Theory
Exam Structure (2026)
The CM2 exams are entirely home-based. You must pass with a 50% overall mark.
- Paper A (70% weightage): For the IFoA, this is an MS Word-based exam. For the IAI, this is a mixed format consisting of 70% descriptive questions and 30% MCQs.
- Paper B (30% weightage): For both the IFoA and IAI, this is a practical exam conducted purely on MS Excel.
CM2 Syllabus & Study Guide
To cover the material thoroughly, expect an overall study time of approximately 200 to 250 hours depending on your background.
| Unit / Topic | Description | Topic Study Hours |
|---|---|---|
| Efficient Market Hypothesis | Types of market efficiencies (strong, semi-strong, weak). Implications for technical/fundamental analysis and insider trading. | 3 Hours |
| Utility Theory | Understanding which investment, lottery, or insurance policy a rational investor will pick based on their specific risk preference. | 7 Hours |
| Measures of Investment Risk | Exploring the different mathematical metrics used to measure investment risk. | 9 Hours |
| Portfolio Theory & Asset Pricing Models | How to evaluate the risk and returns of portfolios of investments. | 15 Hours |
| Stochastic Models for Investment Return | The implications for accumulated values and present values if the interest rate is treated as a random variable. | 6 Hours |
| Stochastic Calculus | A new type of calculus (Brownian Motion, Martingales, Ito Process) and using it to accurately model security prices. | 20 Hours |
| Understanding Derivatives | Characteristics of Derivative Securities and The Greeks. How derivative prices change with factors like time to maturity and underlying price. | 20 Hours |
| Pricing Derivatives | How to price discrete and continuous time derivatives (Binomial Model, Black Scholes Option Pricing Formula, 5-Step Methods). | 40 Hours |
| Credit Risk Modelling | Stochastic models for term structure of interest rates and using stochastic calculus to model credit risk. | 20 Hours |
| Ruin Theory | Calculating the mathematical probability of an Insurance Company's ruin. | 15 Hours |
| Run-Off Triangles | Techniques and methodologies for General Insurance Reserving. | 15 Hours |