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A Comprehensive Guide to Financial Risk Management

What is Financial risk management?


Financial risk management refers to the process of dealing with uncertainties resulting from financial markets. The process involves identifying the sources, measuring them, and making plans to address them.


The image shows a guide to financial risk management

The main idea of this FRM system is to protect the economic value of a firm by using financial instruments and manage exposure to risk. Financial risk management is an ongoing process, where different strategies have to be implemented and refined as market and requirements change. The entire FRM process can be summarized into the following steps:


  • Identification and prioritization of key financial risks.
  • Determining the level of risk tolerance.
  • Implementation of risk management strategy in accordance with policy.
  • Measure, report, monitor, and refine the process as needed.


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What is Risk?


The word risk can be used in different contexts. However, the risk is the possibility that an outcome is not as expected and is usually related to returns on investment in the finance sector. In simple terms, risk means the probability of losing money in an investment. When there is a loss of investment, then it is a financial risk for an individual.


Similarly, financial risk for businesses may occur due to problems in the operations of the business such as credit risk and market risk. Inability to control inflation, defaulting bonds and other debt instruments signify government financial risk. One example of financial risk is the great recession of 2008.


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Types of financial risk


Financial risk can be categorized into 2 of the following types based on the factors that influence the risk.



This type of risk generally affects the whole economy of a place such as a recession.



This type affects specific sectors or companies and can be minimized by careful planning.


Apart from the 2 broad categories mentioned above, there are other types of financial risks as described below.


Market risk


Market risks can be both systematic and non-systematic which can ultimately result in loss of investment. Recession, change in interest rates, natural disasters are reasons for systematic risks. Non-systematic risks can be avoided by changes in operations, planning, and strategy.


Whenever there is an upgrade in technology, change in prices, or change in consumption pattern of customers, then there is a possibility of intensification in market risk. Other types of market risks are absolute risk, relative risk, basis risk, and volatility risk


Credit risk


When a borrower is unable to pay back the debt as per the contractual commitment, there is a possibility of a bad reputation in the market, loss of investor’s confidence, and very low chances to borrow money from financial institutions.


Credit risk for the government can result in high inflation rates and disturb the nation’s relationship with other countries. Credit risk can be divided into sovereign and settlement risks. Risks arising out of difficult foreign exchange policies are called sovereign risk whereas, the inability of a party to fulfill its obligations is called settlement risk.


Liquidity risk


When a company or individual fails to pay out its short-term financial obligations due to the inability to sell the assets in the market without loss, it connotes liquidity risk. Maintaining diversified investments in short-term assets and maintaining cash to meet short-term business obligations can help manage liquidity risk.


2 types of liquidity risks are asset liquidity risk and funding liquidity risk. Lack of funds causes funding liquidity risk, and insufficient buyers and sellers against the required order lead to asset liquidity risk.


Operational risk


This signifies a reduction in output capacity, which can be the result of decisions from management to provide unwanted results. Operational risk can be managed by change of decision, upgrading and maintenance of technology. This can again be classified into model risk and fraud risk. Model risk arises out of incorrect model application whereas fraud risk arises due to lack of controls.


Legal risk

Legal risk is a part of operational risk and arises mainly due to lawsuits and other legal proceedings.


Political risk

This is due to unreasonable and unstable political conditions or any new legislation that may affect a company/sector.


Financial Risk Management Course (FRM)


This course is a qualification for risk management professionals. The designation earned by the professionals is an international professional certification offered by the Global Association of Risk Professionals.


FRM Course is a globally recognized professional course and helps create a noticeable impression as it offers a competitive advantage for an individual over other peer groups. Here in this course professionals get to learn and understand financial risk concepts, credit-ability, and also ways to improve their earning potential. Initially in 1997, when the course was first introduced it had only one exam. Since May 2010, Financial Risk Management Course had 2 exams – Part 1 and Part 2.


What to do before FRM registration?


There are certain typical things that candidates have to remember before getting themselves enrolled in the FRM course.


  • For proof of identity, an original passport or driving license issued in the country of residence is required during registration. No other identification proof is accepted. So, it is advisable to get any of these two readies before the exam.
  • The name used during registration should always spell the same way as it is spelled in the passport or driving license. Any other name or script is not accepted.
  • It is a good idea to go through the FRM program guide before registration.
  • One should evaluate their need for Americans with Disabilities or may request for other exam dates due to religious reasons.
  • One should choose their exam center wisely.
  • Learn about the GARP’s exam policies before registration.




Any individual with a graduation in any field is eligible for this Financial Risk Management Course. However, one needs to qualify for an entrance exam to be able to secure admission into this course.

Once admitted to the course an individual can get certified only when the following 3 conditions are valid:

  • Qualify both the exams, Part-1 and Part-2.
  • Has got a minimum of 2 years of work experience in the finance sector.
  • Is an active member of the GARP.



This Financial Risk Management Course is usually 1.5 to 2 years of duration.

Exam and pattern:


For qualifying for the Financial Risk Management Course, one has to appear for the CBT (center-based exams). The exams of part -1 are held mostly during the months of May, July, and November. Part -2 exams are held in the month of May and December. Once registered for this course, it is valid for 5 years, which indicates that within this time period the candidate has to clear both the exams and gain 2 years of experience.


The pattern of the FRM exam is as described below.


  • It is a paper-based exam with multiple-choice questions.
  • The exam is conducted only in English across 90 test centers
  • The third Saturday in the month of May and November is chosen for the FRM exam both Part 1 and Part 2.
  • No negative marking
  • The FRM committee decides the passing score for the exams conducted.


Who is this course for?


This Financial Risk Management course is considered ideal for mid-level professionals, having 3-5 years of working experience. Professionals who exclusively demonstrate the knowledge and ability to anticipate, respond, and adapt to critical risk issues are in demand at every bank and firm.


Functions of a Financial Risk Manager


These people are trained extensively during their coursework to identify and reduce risk. Sometimes they also are capable of eliminating risk in business. His/her functions include:


  • Describe and define the risk management process.
  • Understand the risk analysis, assessment, and identification process.
  • Estimate the risk and budget.
  • Evaluate the risk demand.
  • Define the process of risk reporting and maintaining records.
  • Define plans and precautionary actions.
  • Develop risk management proposals and review risk policies.


FRM exam Part-1 Pattern and Syllabus


The exam consists of 100 MCQs to be solved within 4 hours. The syllabus consists of concepts and theories that are typical of the risk manager’s daily work. The subjects covered in the part-1 exam are:


Foundation of risk management — 20% weightage


This area focuses on the foundations of risk management and the value it adds to the organization. Some topics within the subject area:

  • Corporate risk governance and trade-off between risk and return.
  • Efficient portfolio construction.
  • Fundamental asset pricing models.
  • Risk management frameworks.
  • Data quality management.
  • Reviewing major financial disaster models.
  • Ethics for sound risk management. Also, the GARP code of conduct for professional situations is covered here.


Quantitative analysis —   20% weightage


Here the focus is more on the candidate’s knowledge of basic probability and statistics, regression and time series analysis, and various other quantitative methods used in risk management such as:

  • Monte Carlo methods.
  • Value-at-risk estimation.
  • Volatility forecasting models.


Financial markets and products —-   30% weightage


This area is about financial products and market where the candidates trade and includes topics like:


  • Equity options.
  • Corporate bonds and interest rates.
  • Knowledge of hedging related to these financial aspects.


Valuation and risk models —-   30% weightage


This area tests the candidate’s knowledge of valuation techniques and risk models. This may include:

  • Bond hedging and bond valuation.
  • Binomial trees valuation.
  • Knowledge of the Black-Scholes-Merton model.
  • Value-at-risk.
  • Stress testing.
  • Estimation of loss (either expected or unexpected).


FRM exam Part-2 pattern and syllabus


This part mainly focuses on the practical application of risk management tools covered in part-1. Exams consist of 80 MCQs to be solved within 4 hours.


Market risk measurement and management —- 25%


This is about market risk measurement and management and includes topics like:

  • Sensitivities related to the fixed-income interest rate.
  • Exposure to volatility.
  • Value-at-risk and backtesting the value-at-risk.
  • Expected shortfall.
  • Copulas and correlations.
  • Extreme value theory.
  • Estimation methods (parametric and non-parametric).
  • Mortgage-backed securities and exotic options.


Credit risk measurement and management —- 25%


Focus within this category is given to structured finance and credit products such as collateral debt obligation and credit derivatives. Topics such as counterparty risk, default risk and the methodologies to measure it are all-inclusive in this domain.


Operational and integrated risk management —- 25%


This category discusses 2 major areas of increasing importance within firms: operational risk and integrated risk management. It includes:

  • Tools and techniques to measure, manage and mitigate operational risk.
  • Economic capital allocation.
  • Enterprise risk management.
  • Critical issues related to liquidity risk management, model risk, data modeling, IT infrastructure, stress testing, and risk appetite.
  • Candidate’s knowledge of international regulatory frameworks such as Basel.


Risk management in investment management —- 15%


This area deals with risk management techniques linked to the investment management process. Topics covered here are:

  • Risk budgeting and portfolio.
  • Component value-at risk.
  • Issues linked to hedge funds.
  • Issues related to private equity investments.


Current issues in financial markets —- 10%


Topics to be dealt with under this category are:

  • Sovereign risk and crisis of finances.
  • Flash crash.
  • Financial innovation and its associated issues.


Fee structure of Financial Risk Management Course


Part 1

Registration fee can vary from – 825 to 1125 $ (i.e., approx. 60K to 80K INR) depending on the type of registration one prefers such as early, standard, or late registration.


Part 2

Registration fee can vary from – 350 to 650 $ (i.e., approx. 25K to 47K INR) again depending on the type of registration one prefers such as early, standard or late registration.


Job profiles after FRM certification


Financial Risk Management Course certified individuals are always in demand and are required for every industry. Some of the best profiles that these people are hired for are:


  • Risk quantification manger
  • Risk manager
  • Market risk specialists
  • Credit risk specialists
  • Enterprise risk managers
  • Senior risk analyst
  • Chief risk officer
  • Head of operational risk
  • Director of investment risk management


Salary details of FRM certified individuals


The average salary of an FRM certified candidate is around 90K Indian rupees. This amount may vary depending on the experience and skill set of the candidate. It is believed that freshers earn comparatively lower salaries than experienced individuals.


Approximate current salary structure of Financial Risk Management Course certified candidates in India as per their designation is as shown below:


  • Associate Vice president – 18-21 LPA
  • Risk Analyst – 6-8 LPA
  • Risk Manager – 6-10 LPA
  • Senior Business Analyst – 9-11 LPA
  • Financial Analyst – 7-11 LPA

Firms that hire FRM qualified candidates


Financial Risk Management Course helps candidates land themselves in one of the finest companies of the world. A few companies where FRM candidates can apply for work are listed below:

  • ICBC
  • HSBC
  • UBS
  • KPMG
  • Bank of China
  • JP Morgan Chase
  • Bank of America
  • Citigroup
  • Wells Fargo


Study materials for the FRM exams


There are many institutes that help candidates to get FRM qualifications. Some of the study materials as per the Indian Institute of Quantitative Finance are:

  • FRM exam guide book – guide book covering different learning objectives
  • FRM exam refresher – revision book
  • FRM exam visual memory sheets – visual reference of key concepts
  • FRM question bank – question bank with solution
  • Excel models – worksheet models of various concepts

The preparation for the FRM exam can be done in either of the two ways mentioned below.


The Classroom training method


The classroom training method offered by many institutes has a typical method of training the candidates and some of the highlights from the classroom training method are:

  • Some typical hours of classroom training.
  • A 3-day crash course program.
  • Downloadable recorded sessions.
  • Self-tests and practice questions.
  • Complete online support.
  • Question banks with solutions (number of questions may vary for different institutes).
  • Mock test to help candidates familiarize themselves with the real-time scenarios.
  • Some tips and tricks for a quick and easy exam approach.
  • Study materials, online access to portals, and session recordings.
  • Access to interact with faculty and fellow students (probably a doubt clearance forum).


The self-study method


The self-study method also involves a similar structure as the classroom training method except for the live classroom training sessions.

  • Few typical hours of training sessions almost on all the topics.
  • Online study notes and materials
  • Soft copy of complete syllabus along with critical equations
  • Question bank with solutions
  • Live virtual class recordings
  • Concise videos of some most important topics
  • Mock tests to understand the real-time scenario
  • All-time access to materials and recordings
  • Faculty forum to help doubt clarification.


The process of getting FRM certified is as follows


  • Initially one has to complete the FRM certification program by GARP.
  • It is an added value if a candidate has prior experience in financial risk management or related area.
  • The experience should never be a part-time job, teaching, or internship, rather it should be full-time work as a financial analyst.
  • The candidate during registration has to write his/her day-to-day work activities as a financial analyst.
  • All the candidates who clear the FRM exam have to get their work experience verified within 5 years from the date of passing the exam. Anyone who fails to do so will have to re-take the exam to get FRM certified.
  • Candidates should consult FRM resources after the successful completion of the FRM exam so that they are guided on information about CV submission, receiving FRM certificate, and use of the FRM designation.


What should be avoided during an FRM exam?


Every exam has its own rules and regulations. The Financial Risk Management Course is not an exception and GARP has outlined strict administration rules for the exam. 5 most important things to remember while appearing for the FRM exam are given here:


Beginning the exam early

Never open the exam booklet before the specified time. Follow the timing properly.

Writing the exam even after the session has ended

Continuing to write the exam once the time is up is never a good practice. Hence should be avoided in the FRM exam too.


Using mobiles in the classroom

Mobiles are not allowed into the exam place. They should be kept at a designated place during the exam.


Use of wrong calculators during the exam

Only certain types of calculators are allowed for the exam. Candidates should check the GARP’s list of calculators allowed for the exam and use them accordingly.


Dishonest behavior

Never cheat during the exam otherwise this can result in GARP banning the candidate from the FRM exam.


FRM training platforms


Some of the online training platforms for FRM are:

  • Edu pristine
  • The WallStreet School
  • Willey’s Efficient Learning
  • Analyst Prep
  • Fintelligents Institute
  • Indian Institute of Quantitative Finance
  • Bionic turtle
  • Kaplan Schweser
  • Udemy
  • Fintree


Why are financial risk managers in demand?


Financial Risk Managers are always appointed to eliminate all financial risk within companies. Here it is important to understand that other risk management programs deal with general finance, whereas Financial Risk Management Course offers a finance credential that is exclusive for risk management professionals.


This course helps the candidate to have the right skill set to support their expertise. This is considered the most rigorous program in finance which helps people excel in finance management. Not only big companies and firms need financial risk managers but banks also do need people who are FRM certified.


Complex changes are happening to the finance industry due to new norms and regulations. With the new transformation in the industry, there is an increased risk arising out of volatile financial markets and cyber threats. Therefore, the demand for financial risk managers has increased. In spite of the demand for financial risk managers, there is a shortage of risk managers because of the inadequate skill set or qualification required to fill that position.


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There was a survey conducted by Accenture “The Global Risk Management Study” where 446 risk executives were surveyed from across different organizations and industries. The study showed 98% reported an increased need for risk management at their organization compared to previous years. There was a huge difference in demand and supply. Approximately 54% of executives reported that there was a shortage of properly skilled candidates to handle risk management.


The shortage of aptitude for data analysts was approximate 61%, for risk technologists approximately 60%, and for the regulatory program, managers were approximately 58%. After this survey, it was understood that the biggest reason for talent shortage is that higher education has not understood the growing demand for risk management professionals.


Currently, very few universities offer graduate programs on Risk Management. Another reason for the shortage of talent/skill was the lack of formal programs that certify risk professionals. Many programs and certifications should be introduced to deal with the shortage of talent. Also, financial firms can plan to create internal talent development courses to supplement the certification programs for risk professionals.

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