Financial risk management

Institutions American Risk and Insurance Association Association of Insurance and Risk Managers in Industry and Commerce Global Association of Risk Professionals Global Risk Institute Institute of Risk Management Professional Risk Managers' International Association Risk and Insurance Management Society Certifications Certificate in Quantitative Finance (CQF) Certified Risk Analyst (CRA) Certified Risk Management Professional (RIMS-CRMP) Certified Risk Professional (MIRM designation) Chartered Enterprise Risk Analyst (CERA; Society of Actuaries) Chartered Enterprise Risk Actuary (CERA; Institute and Faculty of Actuaries) Financial Risk Manager (FRM) Professional Risk Manager (PRM)

Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally credit risk and market risk, with more specific variants as listed aside - as well as some aspects of operational risk. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to mitigate them.^[1]^[2] See Finance § Risk management for an overview.

Financial risk management as a "science" can be said to have been born^[3] with modern portfolio theory, particularly as initiated by Professor Harry Markowitz in 1952 with his article, "Portfolio Selection";^[4] see Mathematical finance § Risk and portfolio management: the P world.

The discipline can be qualitative and quantitative; as a specialization of risk management, however, financial risk management focuses more on when and how to hedge,^[5] often using financial instruments to manage costly exposures to risk.^[6]

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.^[7]^[8]
Within non-financial corporates,^[9]^[10] the scope is broadened to overlap enterprise risk management, and financial risk management then addresses risks to the firm's overall strategic objectives.
In investment management^[11] risk is managed through diversification and related optimization; while further specific techniques are then applied to the portfolio or to individual stocks as appropriate.

In all cases, the last "line of defence" against risk is capital, "as it ensures that a firm can continue as a going concern even if substantial and unexpected losses are incurred".^[12]

^ Peter F. Christoffersen (22 November 2011). Elements of Financial Risk Management. Academic Press. ISBN 978-0-12-374448-7.
^ Financial Risk Management, Finance Glossary. Gartnergartner.com
^ W. Kenton (2021). "Harry Markowitz", investopedia.com
^ Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance. 7 (1): 77–91. doi:10.2307/2975974. JSTOR 2975974.
^ Cite error: The named reference Welch was invoked but never defined (see the help page).
^ Allan M. Malz (13 September 2011). Financial Risk Management: Models, History, and Institutions. John Wiley & Sons. ISBN 978-1-118-02291-7.
^ Van Deventer, Nicole L, Donald R., and Kenji Imai. Credit risk models and the Basel Accords. Singapore: John Wiley & Sons (Asia), 2003.
^ Drumond, Ines. "Bank capital requirements, business cycle fluctuations and the Basel Accords: a synthesis." Journal of Economic Surveys 23.5 (2009): 798-830.
^ John Hampton (2011). The AMA Handbook of Financial Risk Management. American Management Association. ISBN 978-0814417447
^ Cite error: The named reference chron.com was invoked but never defined (see the help page).
^ Cite error: The named reference Kenton was invoked but never defined (see the help page).
^ Cite error: The named reference PRMIA was invoked but never defined (see the help page).

[Christoffersen2011-1] Peter F. Christoffersen (22 November 2011). Elements of Financial Risk Management. Academic Press. ISBN 978-0-12-374448-7.

[2] Financial Risk Management, Finance Glossary. Gartnergartner.com

[:0-3] W. Kenton (2021). "Harry Markowitz", investopedia.com

[4] Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance. 7 (1): 77–91. doi:10.2307/2975974. JSTOR 2975974.

[Welch-5] Cite error: The named reference Welch was invoked but never defined (see the help page).

[Malz2011-6] Allan M. Malz (13 September 2011). Financial Risk Management: Models, History, and Institutions. John Wiley & Sons. ISBN 978-1-118-02291-7.

[Van_Deventer_Imai-7] Van Deventer, Nicole L, Donald R., and Kenji Imai. Credit risk models and the Basel Accords. Singapore: John Wiley & Sons (Asia), 2003.

[Drumond-8] Drumond, Ines. "Bank capital requirements, business cycle fluctuations and the Basel Accords: a synthesis." Journal of Economic Surveys 23.5 (2009): 798-830.

[Hampton-9] John Hampton (2011). The AMA Handbook of Financial Risk Management. American Management Association. ISBN 978-0814417447

[chron.com-10] Cite error: The named reference chron.com was invoked but never defined (see the help page).

[Kenton-11] Cite error: The named reference Kenton was invoked but never defined (see the help page).

[PRMIA-12] Cite error: The named reference PRMIA was invoked but never defined (see the help page).

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