Financial risk management
Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk: Operational risk, credit risk and market risk, Foreign exchange risk, Shape risk, Volatility risk, Liquidity risk, Inflation risk, Business risk, Legal risk, Reputational risk, Sector risk etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.
Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.
Uses of financial risk management
Finance theory (i.e., financial economics) prescribes that a firm should take on a project if it increases shareholder value. Finance theory also shows that firm managers cannot create value for shareholders, also called its investors, by taking on projects that shareholders could do for themselves at the same cost.
When applied to financial risk management, this implies that firm managers should not hedge risks that investors can hedge for themselves at the same cost. This notion was captured by the so-called "hedging irrelevance proposition": In a perfect market, the firm cannot create value by hedging a risk when the price of bearing that risk within the firm is the same as the price of bearing it outside of the firm. In practice, financial markets are not likely to be perfect markets.
This suggests that firm managers likely have many opportunities to create value for shareholders using financial risk management, wherein they have to determine which risks are cheaper for the firm to manage than the shareholders. Market risks that result in unique risks for the firm are commonly the best candidates for financial risk management.
The concepts of financial risk management change dramatically in the international realm. Multinational Corporations are faced with many different obstacles in overcoming these challenges. There has been some research on the risks firms must consider when operating in many countries, such as the three kinds of foreign exchange exposure for various future time horizons: transactions exposure, accounting exposure, and economic exposure.
Financial Risk Manager
FRM® (Certified Financial Risk Manager Program) is an international professional certification offered by GARP (The Global Association of Risk Professionals). GARP is the only recognized membership association for professional risk managers. GARP is a not-for-profit organization and aims at creating a cultural environment of risk awareness and management at every organizational level. The corporate headquarters of GARP is located in Jersey City, New Jersey with a regional office in London, England. GARP enables the risk community to make better informed risk decisions through "creating a culture of risk awareness®".
There are half a million members across 195 countries of the GARP. Central banks, commercial banks, investment banks, corporations, asset management firms, academic institutions and government agencies employ the members of GARP.
- Top 10 global banks employing FRMs are Bank of America, Bank of China, ICBC, Agricultural Bank of China, HSBC, Wells Fargo, Citigroup, Banco Santander, JP Morgan Chase, China Construction Bank.
- Top 80 companies employing FRMs are Goldman Sachs, KPMG, Deloitte, PIMCO, JP Morgan, BlackRock, Morgan Stanley, Credit Suisse, Bridgewater Associates, Man Group, Barclays, ING, AIG etc.
The curriculum is updated annually by a group of distinguished risk professionals employed internationally at nearly every major bank, asset management firm, hedge fund, consulting firm, and regulator in the world.
FRM joins a network of professionals in more than 190 countries and territories worldwide.
- The FRM Exam Part I covers the tools used to assess financial risk : Foundations of Risk Management, Quantitative Analysis, Financial Markets and Products, Valuation and Risk Models.
- The FRM Exam Part II focuses on the application of the tools acquired in the FRM Exam Part I through a deeper exploration of: Market Risk Measurement and Management, Credit Risk Measurement and Management, Operational and Integrated Risk Management, Risk Management and Investment Management, Current Issues in Financial Markets.
- Successful candidates take an average of two years to earn their FRM Certification.
- GARP recently completed a Financial Risk Manager (FRM) Job Task Analysis to identify the work performed by financial risk professionals and the knowledge and skills required to effectively perform these tasks. Their findings indicate a need for risk managers to have not only the traditional quantitative and technical skills associated with risk management but also the ability to effectively interpret and communicate their findings to stakeholders.
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- CERA - The Chartered Enterprise Risk Analyst Credential - Society of Actuaries (SOA)
- Financial Risk Manager Certification Program - Global Association of Risk Professional (GARP)
- Professional Risk Manager Certification Program - Professional Risk Managers' International Association (PRMIA)
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