We all are aware of the term ‘risk’ in a literal way and how it impacts one’s decision making. To put it in layman terms, risk is what we think can go wrong or against the plan or expectation. Preventing risk is an act of getting things to work in favor by taking necessary measures or actions. Since there are numerous categories of risk depending on the type and the industry, it has become extremely important to start preparing at an earlier stage. This is where Risk Management falls into the picture emphasizing the need for Risk Managers and preventive strategies.
What is Risk Management?
Risk Management is assessing the processes or situations, identifying the risk areas, and controlling the event or taking measures to prevent risks at an organizational level. When talking about Financial risks, the major role of the Risk Manager lies in controlling or managing risks that will impact the capital and earnings of the organization. There are numerous reasons that pose a threat to the organization, which includes natural disasters, financial uncertainty, management errors, legal liabilities, etc. Risk Management enables an organization to prepare in advance for such unforeseen risks. The strategies might not completely eradicate the risk or its impact but will help to minimize the risk impact and losses.
Objectives of Risk Management
Identification and Evaluation of Risk
Reducing and eliminating the threats
Efficient usage of resources
One of the objectives of risk management is identifying the risk areas and evaluating the impact of the risk. Past data or information is analyzed to identify the possible events likely to occur in the future. Accordingly, the Risk Managers work on the measure that need to be taken.
There are certain threats that affect the productivity and profitability of the organization. The other objective of risk management is to introduce measures that will eliminate or reduce the impact of such threats. Risk Managers form strategies and analyze their performance from time to time.
The objectives of risk management also include the efficient utilization of resources. By ensuring efficient utilization, the organization can reduce wastage, enable processes to run as per the plan, and meet the targets at the estimated cost and time.
Types of Risk Management
There are numerous types of risk, and depending on the nature, Risk Managers are appointed. Here are the different types of Financial Risk Management.
Market Risk Management
Transaction Risk Management
Inflation Risk Management
Liquidity Risk Management
Operational Risk Management
Market risk is the risk of a decline in the value of the investment pertaining to economic conditions. This includes risk related to equity, currency rates, interest rates, etc. Equity risk is when there is a decline in the value of investments due to the varying demand and supply in the market, which leads to a decrease in the price of equity. Interest rate risk is when a rise or drop in the interest rates impacts the price of the bond investment in the market. Similarly, currency risk or exchange rate risk is the loss of value due to fluctuating exchange rates.
Transaction risk is the impact of the fluctuating exchange rates on the transaction that is not yet settled. Transaction risk occurs when there is a delay or long gap between the date of entering a contract and settling the transaction.
Inflation risk arises when your purchasing power decreases as you are able to buy less products at the same amount. The inflation risk affects cash and debt investments more than any other type of investment.
Liquidity risk arises when you are not able to realize a fair value on your investments when you want to sell the investments. The major reason behind the liquidity risk is a decrease in the market value or unavailability of a buyer.
Credit risk arises due to the inability of the borrower to repay the borrowed funds. There is a major requirement for Credit Risk Managers at the banks and financial institutions that lend funds.
Operational risk is the risk related to business processes and arises due to human errors. The nature of the risk may differ from industry to industry. Operational risk management includes controlling the procedures, people, policies, and other responsible factors.
Career in Risk Management
A career in Risk Management opens doors to several opportunities. But to have a successful career, a candidate needs to have expertise in the field of risks. The most opt course for financial risk management is the FRM course. Financial Risk Manager, FRM course is offered by the Global Association of Risk Professionals (GARP, USA). This financial risk management course can be pursued as an online certification course where the candidate needs to prepare and appear from the exams directly. Here are the details to help you plan your career in financial risk management.
The FRM certification course can be completed by clearing the two parts, FRM part 1 and FRM part 2 exams. GARP announces the examination dates every year for both the exams, Part 1 and Part 2. The exams are mostly scheduled in the month of May and November. Only during unavoidable circumstances, the exam month may vary like the May 2020 exam being postponed to October 2020 due to the prevailing conditions. Candidates need to pay the examination fee for each part while registering for the exam.
FRM Syllabus – Part 1
|Foundations of Risk Management||20%|
|Financial Markets and Products||30%|
|Valuation and Risk Models||30%|
FRM Syllabus – Part 2
|Market Risk Measurement and Management||25%|
|Credit Risk Measurement and Management||25%|
|Risk Management and Investment Management||15%|
|Operational and Integrated Risk Management||25%|
|Current Issues in Financial Markets||10%|
To obtain the certification, a candidate must clear both the exams and gain 2 years of relevant work experience. Once the candidate has met the above-mentioned criteria and obtained the fellow membership of GARP, the candidate is certified as a Financial Risk Manager.