Financial risk management

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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.[1]

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.[2]

In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.[3][4]

Uses of financial risk management[edit]

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.[5]

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":[6] 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.[7][8][9][10]

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.[11]

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,[12] accounting exposure,[13] and economic exposure.[14]

Financial risk manager[edit]

FRM (Certified Financial Risk Manager Program) is an international professional certification offered by GARP (The Global Association of Risk Professionals).[15][16][17] FRM certificants are to be found in more than 190 countries and territories worldwide.[18] Successful candidates take an average of two years to earn their FRM Certification.[19] FRMs are employed at major banks (Bank of America, Bank of China, ICBC...) and corporates (Goldman Sachs, KPMG, Deloitte, PIMCO, JP Morgan, BlackRock..).[16][20][21][22][23][24]

The FRM curriculum is updated annually by risk professionals employed internationally at major banks, asset management firms, hedge funds, consulting firms, and regulators.[undue weight? ][18] The Exam curriculum:[25][18]

  • 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.

See also[edit]


  • Crockford, Neil (1986). An Introduction to Risk Management (2nd ed.). Woodhead-Faulkner. ISBN 0-85941-332-2.
  • Charles, Tapiero (2004). Risk and Financial Management: Mathematical and Computational Methods. John Wiley & Son. ISBN 0-470-84908-8.
  • Conti, Cesare & Mauri, Arnaldo (2008). "Corporate Financial Risk Management: Governance and Disclosure post IFRS 7", Icfai Journal of Financial Risk Management, ISSN 0972-916X, Vol. V, n. 2, pp. 20–27.
  • Lam, James (2003). Enterprise Risk Management: From Incentives to Controls. John Wiley. ISBN 978-0-471-43000-1.
  • McNeil, Alexander J.; Frey, Rüdiger; Embrechts, Paul (2005), Quantitative Risk Management. Concepts, Techniques and Tools, Princeton Series in Finance, Princeton, NJ: Princeton University Press, ISBN 0-691-12255-5, MR 2175089, Zbl 1089.91037
  • van Deventer; Donald R.; Kenji Imai; Mark Mesler (2004). Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management. John Wiley. ISBN 978-0-470-82126-8.


  1. ^ Peter F. Christoffersen (22 November 2011). Elements of Financial Risk Management. Academic Press. ISBN 978-0-12-374448-7.
  2. ^ Allan M. Malz (13 September 2011). Financial Risk Management: Models, History, and Institutions. John Wiley & Sons. ISBN 978-1-118-02291-7.
  3. ^ Van Deventer, Donald R., and Kenji Imai. Credit risk models and the Basel Accords. Singapore: John Wiley & Sons (Asia), 2003.
  4. ^ Drumond, Ines. "Bank capital requirements, business cycle fluctuations and the Basel Accords: a synthesis." Journal of Economic Surveys 23.5 (2009): 798-830.
  6. ^ KRISHNAMURTI CHANDRASEKHAR; Krishnamurti & Viswanath (eds.) "; Vishwanath S. R. (2010-01-30). Advanced Corporate Finance. PHI Learning Pvt. Ltd. pp. 178–. ISBN 978-81-203-3611-7.
  7. ^ John J. Hampton (1982). Modern Financial Theory: Perfect and Imperfect Markets. Reston Publishing Company. ISBN 978-0-8359-4553-0.
  8. ^ Zahirul Hoque (2005). Handbook of Cost and Management Accounting. Spiramus Press Ltd. pp. 201–. ISBN 978-1-904905-01-1.
  9. ^ Kirt C. Butler (28 August 2012). Multinational Finance: Evaluating Opportunities, Costs, and Risks of Operations. John Wiley & Sons. pp. 37–. ISBN 978-1-118-28276-2.
  10. ^ Dietmar Franzen (6 December 2012). Design of Master Agreements for OTC Derivatives. Springer Science & Business Media. pp. 7–. ISBN 978-3-642-56932-6.
  11. ^ Corporate Finance: Part I. Bookboon. pp. 32–. ISBN 978-87-7681-568-4.
  12. ^;jsessionid=EFA8D4FB63329F2C94F48279646551BF?contentType=Article&contentId=1649008 (contrary to conventional wisdom it may be rational to hedge translation exposure. Empirical evidence of agency costs and the managerial tendency to report higher levels of translated income, based on the early adoption of Financial Accounting Standard No. 52).
  13. ^ Aggarwal, Raj, "The Translation Problem in International Accounting: Insights for Financial Management." Management International Review 15 (Nos. 2-3, 1975): 67-79. (Proposed accounting framework for evaluating and developing translation procedures for multinational corporations).
  14. ^ (Discusses the benefits for hedging in foreign currencies for MNCs).
  15. ^ SEC(Securities and Exchange Commission),
  16. ^ a b The Global Association of Risk Professionals,!/frm/
  17. ^ Linkedin,
  18. ^ a b c Official Candidate Guide,
  19. ^ GARP Frequently-Asked-Questions -EXAM regulations-,!/frm/frequently-asked-questions
  20. ^ Wallstreetmojo official FRM salary,
  21. ^ Chen, Liyan. "2015 Global 2000: The World's Largest Banks", Forbes Magazine.
  22. ^ The Benefits of Professional Certification, William May William May Senior Vice President,
  23. ^ iactglobal(2010. 5.)
  24. ^ 2012 Financial RiskManager Roadshow,
  25. ^ GARP Buy Side Risk Managers Forum – Risk Principles for Asset Managers(2015.6.11)

External links[edit]