The Financial Risk Manager program (FRM) is an exam certification that is offered to individuals interested in working in the financial risk management department of firms. It is an internationally recognized certification that is administered by the Global Association of Risk Professionals (GARP). A Financial Risk Manager can be employed as a risk manager in various companies including banks, non-banking financial institutions, the Treasury Department, etc.
As compared to other globally recognized exams, FRM exams are much more detailed and specialized and the calculations are complex. The exam focuses on risk analysis and the identification and minimization of risky situations within a company or on selected portfolios. FRM questions have been tailored to reflect practical real-world experiences of a financial risk manager’s daily encounters, so as to give a candidate risk management concepts and approaches that they will need to apply in their work areas. In addition to the knowledge obtained while pursuing the FRM accreditation, an FRM is expected to be knowledgeable in the states of the money markets and the regulations governing the markets in his/her region, including all Basel regulations.
Requirements Needed to Sit the FRM Exams
There are no special requirements needed to sit FRM exams. A person does not even have to have any proof of education prior to enrolling for FRM exams. However, individuals with a background in finance, especially those who took finance as their major, will tend to have an upper hand.
The FRM exam has been divided into two parts:
- FRM Part 1
- FRM Part 2
We will discuss the various parts in detail later on in this article.
Exam Preparation Time
The Global Association of Risk Professionals recommends an average study period of 275 hours for each part of the FRM exam. However, some candidates have reported having used up-to 400 hours to prepare for each of the exam parts. Note that using our summarized notes and video tutorials will greatly reduce the study period while still ensuring that you grasp all the important content. You can find such study materials for FRM exams here: https://analystprep.com/frm/
Exam Pass rate
According to the May 2019 statistics, the pass rates were 42% for FRM Part 1 and 60% for FRM Part 2. This gives an average pass rate of 51% for both.
Where can an FRM Work?
Upon successful completion of FRM part 1 and FRM part 2, an individual opens up a wide range of possibilities for his/her career. In addition to having huge salary compensation (approximated at between $51,000 to $130,000 depending on the company and a person’s job rank), a person gets to be employed in major financial companies, asset management firms, audit firms, government agencies and corporations and major investment banks, and thus gets to obtain unrivaled work experience in addition to building a strong network for himself/herself.
The major financial providers that employ FRMS include KPMG, Price Water Cooper House, Ernst & Young, Citigroup, and ICBC. The major banks that employ FRMS include Bank of America, Bank of China, and Wells Fargo.
An FRM should, therefore, not worry about the prospects of not getting employed as the title brings with itself many lucrative job opportunities.
To enroll for the FRM program, a candidate needs to part with a one-time registration fee of $400. This one-time registration fee covers the costs of purchasing an FRM part 1 eBook. Upon payment of the registration fee, the rest of the fees will depend on whether a candidate registers before the early, mid or late registration deadline.
The registration fee as shown in the Global Association of Risk Professionals website is as summarized below.
For FRM part 1:
- Early registration fee: $425
- Mid registration fee: $550
- Late registration fee: $725
For FRM part 2:
- Early registration fee: $350
- Mid registration fee: $475
- Late registration fee: $650
FRM Exam Dates
FRM exams are offered twice a year, in May and in November. For example, the 2020 FRM exams are offered on the 16th of May and on the 21st of November.
FRM Exam Style
FRM exams are multiple-choice exams. Part 1 has 100 multiple choice questions and is offered during morning hours with a maximum time period of 4 hours. Part 2 has 80 multiple-choice questions. It is offered in the afternoon and a candidate has to complete it within 4 hours. Just like CFA exams, GARP does not penalize wrong answers.
Candidates can sit both exam parts on the same day. However, at AnalystPrep we recommend sitting the part 1 exam first and then sitting the part 2 exam six months later.
Exam results are availed, via mail, roughly one and a half months after sitting for the exams.
The Global Association of Risk Professionals accepts three payment modes:
- Wire transfer that will cost a candidate an extra $50 processing fee;
- Check from a United States-based bank. Checks from other countries with a US intermediate bank wire are equally accepted; or
- Credit card: Mastercard, Visa, or American Express.
FRM Part 1
FRM Part 1 has a historical pass rate of around 45%. The level of difficulty is comparable to the CFA level 1 exam and its pass rate is quite similar.
Generally, FRM Part 1 introduces a candidate to the various basic risk techniques and tools. It tests on four major areas:
- Foundations of Risk Management (weighted at 20%)
- Quantitative Analysis (weighted at 20%)
- Financial Markets and Products (weighted at 30%)
- Valuation and Risk Models weighted at (30%)
Foundations of Risk Management
This area equips a candidate with knowledge in concepts needed to manage risk and how managing risk adds value to a firm/company. Among the concepts taught in this area are:
- Corporate risk governance and the relationship between risk and return
- Models used to price assets
- Efficient construction of portfolios.
- Effective management of risks
- Quality data management
- Ethics and the importance of ethical behavior and ethical conduct in a professional environment.
This topic favors individuals with a background in probability and statistics as it focuses on concepts like regression analysis, models used to forecast volatility and time series analysis, which apply knowledge taught in probability and statistics classes.
Financial Markets and Products
This section equips an individual with knowledge in financial markets (money markets, futures, options, swaps, futures and forwards, commodities, currencies, corporate and government bonds and their interest rates capital markets, derivatives among others), how to trade them and where to trade them.
It also equips a candidate with basic hedging and arbitrage knowledge needed in preventing financial risks.
Valuation and Risk Models
This area introduces a candidate to various models used to value and analyze risks. The main sub topics taught in this area are:
- How to value securities using binomial trees
- How to estimate the value of options using the Black-Scholes-Merton (BSM) model
- Stress testing
- How to determine the value at risk (VaR)
- How to estimate the expected loss (EL) and unexpected loss (UL) of a portfolio
- How to value bonds and hedge against any losses associated with bonds
FRM Part 2
FRM Part 2 focuses on the application of the risk concepts and techniques introduced in FRM Part 1.
FRM Part 2 tests a candidate’s knowledge on 5 major areas as shown below:
- Market Risk Measurement and Management (weighted at 20%)
- Credit Risk Measurement and Management (weighted at 20%)
- Operational and Integrated Risk Management (weighted at 20%)
- Liquidity and Treasury Risk Management and Measurement (weighted at 15%)
- Risk and Investment Risk Management (weighted at 15%)
- Current Issues Arising in Financial Markets (weighted at 10%)
Market Risk Measurement and Management
Just as the name suggests, this area equips a candidate with knowledge on measuring and managing market risk. The various sub topics further covered in this area include:
- Parametric estimation methods,
- Non-parametric estimation methods,
- How to calculate and test value at risk (VaR) and expected shortfall (ES),
- Models to estimate short-term interest rates,
- The volatility smile in options markets,
Credit Risk Measurement and Management
This topic focuses on credit products including debt obligations and credit derivatives. It equips candidates with knowledge in measuring credit value at risk and determining default and counterparty risk.
Operational and Integrated Risk Management
This area is gaining more importance among many firms and companies. It tests a candidate’s knowledge of the risks involved in operating a business. Among the sub-topics featured in this area include:
- Rules and regulations governing the operations of risk managers
- Stress testing is examined further in this area
- Risk and Loss Data Modeling
- Liquidity and Enterprise risk management
- Tools and techniques used to identify, measure and hedge against operational risk
Liquidity and Treasury Risk Management and Measurement
This is a new topic introduced in the 2020 curriculum. As the name suggests, it focuses on liquidity and treasury management – simply put, the amount of cash on hand that financial institutions need to remain solvent and stay in business.
Risk and Investment Risk Management
The focus on this area is on the management techniques applied to risks facing an Investment Management process. This area teaches candidates skills that will be applied in constructing portfolios, analyzing the performance of portfolios, and calculating the value at risk (VaR) and expected shortfall (ES) of portfolios.
Current Issues in Financial Markets
The current issues portion of the exam tests the candidate’s knowledge acquired in the preceding areas. The main sub-topic covered in this area is financial innovations. Each year, these chapters are updated to reflect the latest academic research in the field of risk management.
Answers to Commonly Asked Questions (FAQs about FRM Exams)
Is it possible to do both CFA and FRM?
It is very possible to do both CFA and FRM. Obtaining both the CFA and FRM certifications boosts an individual’s financial expertise and qualifications. Studying for the two certifications concurrently is possible as they share some common areas of knowledge. It is also possible to take a one year break in between CFA exams to pursue FRM exams as both parts of the FRM exams can be completed on the same day.
Can a candidate sit for both FRM Part 1 and Part 2 at the same time?
The answer is yes. It is possible for an individual to sit for both FRM Part 1 and FRM part 2 at the same time (morning session for FRM Part 1 and afternoon session for FRM Part 2). It is, however, important to note that FRM Part 2 will ONLY be marked after a candidate’s part 1 has been marked as a pass.
Is CFA better than FRM?
Contrary to CFA that has a more generalized approach, FRM’s approach is more detailed and more specialized. This is to say that whilst CFA will give you basic knowledge of most financial concepts, FRM will give a candidate deeper knowledge concerning financial risks. A Financial Risk Manager, is thus, more specialized than a Chartered Financial Analyst. FRM is also a growing accreditation as compared to CFA. According to recent statistics, the number of CFA charterholders exceeds by far the number of qualified Financial Risk Managers.
Does FRM have an expiration period?
After completion of both FRM Part 1 and 2, a candidate has up to 5 years to present two years of full-time work experience in the field of financial risk to the Global Association of Risk Professional’s board to be awarded the FRM certificate. If this is not presented to the board within 5 years, then an individual will be required to retake the FRM exams.
Can FRM pass for a degree?
FRM cannot pass for a degree as it is just a professional certification. It, however, paves a way in a rapidly growing industry.
Are there any requirements needed for an FRM certification?
Yes. Apart from passing both FRM Part 1 and FRM Part 2, a candidate needs two years of full-time work experience in the field of financial risk.
At AnalystPrep, we have helped thousands of candidates prepare for FRM Part 1 and FRM Part 2 exams. With testimonials from so many candidates who passed the exam on first attempt, we believe that we have contributed to the success of individuals who chose to trust us with their studies.
From our very able pool of experts, we will provide you with summarized notes to save you the hustle of reading through the many pages, we will respond to all your questions regarding FRM, keep you updated on the various important dates, give you mock examinations and provide you with video tutorials to aid your understanding. You can see all our study materials for FRM exams at https://analystprep.com/frm/