There are many aspects of risk analysis that demand the skills, training, and insight of a risk management certification, and the oversight of a Risk Manager. Over the past 15 years volatile economic and financial times have increased the need for effective financial risk management. As a result the financial risk field has expanded dramatically, as more individuals start careers as risk managers, more businesses offer risk maintenance services, and more company's develop internal financial risk management policies. With each passing year the range of complex financial instruments increases, as does government oversight and regulation. High-profile financial collapses such as Lehman Brother sand Bear Stearns demonstrated that even financial giants can get off track as a result of poor risk management processes.
There is financial risk inherent in many of a businesses processes including in its exposure to financial markets, its transactions and interactions with other parties including suppliers and customers, and its internal functions. The focus of the financial risk management specialty is on the company's exposure to financial markets, but the financial risk manager can provide excellent advice on risk concepts both financial and other. Standard examples of financial markets that businesses are exposed to include currencies, commodities, and interest rates. As these markets fluctuate they have can significant impacts on revenues, costs, and profitability. While any individual with a risk management certification can provide insight in to financial risk concepts, there are certain industries that require specialist insight. During the risk training and courses process, those individuals interested in the financial field will take specialty courses that focus on subjects such as credit risk, market risk, and interest rate risk.
Financial risk management is most commonly used in the financial services sector, where firms are handling the assets of another party. This other party is expecting those assets to be managed at a certain level of risk exposure, with a certain expectation for growth. However, financial risk exists for many firms in a diverse range of industries. Businesses with particular types of operations are exposed more than others, such as company's that conduct business internationally, hold large reserves marketable securities or cash, have large capital investments, or operate with large inventories or high rates of inventory turnover.
The objective of business managers is to create value for their investors (read: owners) and they achieve this by undertaking projects and initiatives that add value above the gains their owners could otherwise achieve on their own. To this end, business owners hire certified risk managers to mitigate those risks that present a threat to the value-add' objective. One of the most notable designations in the risk analysis field is the financial risk management certification, including the Financial Risk Manager designation. Financial risk managers can use complex instruments, such as derivatives, to transfer the risk of their firm to a risk-seeking party. Firms must also remember that financial risks to not occur in isolation, and the impact of multiple coincident events interacting must be taken into account.
One of the keys to successful financial risk management is to recognize problems when they initially occur, before their impact increases and when their mitigation is likely to be most cost-effective and cost-efficient. Given the speed with which information can be disseminated in the global marketplace and how quickly this information can have an impact, the financial risk manager has to be proactive and well-informed. Certified financial risk officers utilize complex computer software to conduct quantitative analysis. This analysis allows the business to monitor whether it is operating within manageable ranges of risk exposure, and within its rules of compliance as dictated by internal and external stakeholders. A key to success throughout this process is that all internal stakeholders are in agreement on the primary issues of risk. One of the skills developed during the risk management certification process is the development of effective lines of communication. The risk manager must work with other members of the organization, including senior management, to decide which risks are acceptable and those which should be avoided.
The process of addressing financial risk is similar in many ways to the approach taken by risk managers when approaching general risk. Like other forms of risk management, the process has both a qualitative and quantitative dimension. The larger the project the more chance it is exposed to risk threats, particular financial risk. Larger projects are typically more complex and have longer investment horizons, which presents challenges to the risk manager. Not in all cases is the risk manager focused on removing risk from the equation, because in some cases risk provides a basis for opportunity.
