The **FRM (Financial Risk Manager)** certification, administered by the **Global Association of Risk Professionals (GARP)**, focuses on **managing financial risks** in institutions like banks, asset management firms, and hedge funds. Below are key **FRM-related risks** covered in the curriculum and relevant to risk management professionals:
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### **1. Market Risk**
- **Definition**: Risk of losses due to changes in market prices (e.g., equities, interest rates, currencies, commodities).
- **Examples**:
- Equity price fluctuations.
- Interest rate volatility (e.g., bond price changes).
- Foreign exchange (FX) risk.
- **FRM Focus**: Value-at-Risk (VaR), stress testing, derivatives hedging, and scenario analysis.
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### **2. Credit Risk**
- **Definition**: Risk of loss from a borrower/counterparty failing to meet obligations (default).
- **Examples**:
- Loan defaults.
- Counterparty risk in derivatives (e.g., swaps).
- **FRM Focus**: Credit scoring models, credit derivatives (CDS), credit VaR, and portfolio risk management.
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### **3. Operational Risk**
- **Definition**: Losses from inadequate internal processes, systems, human errors, or external events.
- **Examples**:
- Fraud.
- IT system failures.
- Legal/regulatory penalties.
- **FRM Focus**: Risk Control Self-Assessment (RCSA), Key Risk Indicators (KRIs), and Basel III operational risk frameworks.
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### **4. Liquidity Risk**
- **Definition**: Inability to meet short-term obligations (funding liquidity risk) or to exit positions without significant losses (market liquidity risk).
- **Examples**:
- Bank runs.
- Illiquid asset holdings.
- **FRM Focus**: Liquidity gap analysis, stress testing, and contingency funding plans.
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### **5. Model Risk**
- **Definition**: Risk of errors in financial models leading to incorrect decisions.
- **Examples**:
- Flawed pricing models for derivatives.
- Incorrect risk parameter assumptions.
- **FRM Focus**: Model validation, backtesting, and sensitivity analysis.
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### **6. Systemic Risk**
- **Definition**: Risk of collapse of an entire financial system due to interconnected institutions or markets.
- **Examples**:
- Contagion during the 2008 financial crisis.
- **FRM Focus**: Macroprudential regulation, network analysis, and "too big to fail" frameworks.
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### **7. Reputational Risk**
- **Definition**: Damage to an institution’s reputation leading to loss of clients, revenue, or trust.
- **Examples**:
- Scandals (e.g., money laundering).
- ESG-related controversies.
- **FRM Focus**: Governance frameworks and stakeholder management.
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### **8. Regulatory Risk**
- **Definition**: Risk of legal penalties or operational restrictions due to non-compliance with regulations.
- **Examples**:
- Failing Basel III capital requirements.
- GDPR/CCPA violations.
- **FRM Focus**: Basel Accords, stress testing compliance, and regulatory reporting.
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### **9. Strategic Risk**
- **Definition**: Risk of losses from poor business decisions or failure to adapt to industry changes.
- **Examples**:
- Entering a risky market.
- M&A failures.
- **FRM Focus**: Scenario planning and risk-adjusted performance metrics (RAROC).
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### **10. ESG (Environmental, Social, Governance) Risk**
- **Definition**: Financial losses due to ESG factors (e.g., climate change, social inequality, poor governance).
- **Examples**:
- Stranded assets in fossil fuels.
- Lawsuits over labor practices.
- **FRM Focus**: Climate risk modeling and ESG integration into risk frameworks.
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### **How FRM Addresses These Risks**
The FRM curriculum equips professionals with tools to:
- Quantify risks using **statistical models** (e.g., VaR, Monte Carlo simulations).
- Design **hedging strategies** (e.g., derivatives, diversification).
- Implement **risk governance frameworks** (e.g., Basel III, COSO ERM).
- Conduct **stress testing** and **scenario analysis**.
- Align risk management with **regulatory requirements**.
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The FRM certification is globally recognized and prepares professionals to tackle complex financial risks in roles such as **risk analysts, portfolio managers, and CROs (Chief Risk Officers)**.
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