Financial Risk Management - Engineers most welcome

What is Risk Management ?
Without using any finance heavy jargons, financial risk managemt consists in providing as much as possible stability to the future earnings of a firm . Suppose your company is about to receive its payments in dollars next month when a certain project is complete. Today the dollar-rupee exchange rate is Rs45.00, but next month you expect it to be at Rs 40.So every dollar you receive next month will translate into lesser Rs for you, which is a loss.To tackle such kinds of uncertainities in cash flows, we use finnacial instruments called derivatives.the process is called hedging. The scenario is just one of the uncertainities, there can be uncertainity due many other factors.

Derivatives are a highly mathematical area of subject, and hence engineers are a best fit in risk management. You would be using partial differential equations learnt in ur B-Tech to price a certain derivatives.A highly interesting field for engineers in general.

Why work in Risk Managemnt?

As a risk manager, one can work in any industry/ company, exposed to market/credit/operation risk not just in financial services. This area is highly mathematical and is more suited to engineers like us. Grappling with the accounts/fin. statement part of the CFA course can be frustrating for engineers, for them this area is more appropriate. Plus there is considerably less competition from CA/CPAs as in equity research. One can work at risk management div. at major banks, insurance companies, consulting companies. One can also get into i-bank, specially in the credit derivative side


How to gain Entry into the field?

Apart from MBA, there are two certifications that engineers may want to do in order to gain entry into the field.

1. FRM (Financial Risk Management by GARP):

Exam : It is single exam held once a year in November. The course is challenging but is very comprehensive in nature.

Fees: Around Rs 25,000

Preparation: Schweser notes, handbook, some other textbooks (Philip Jorion etc)

2. PRM (Professional Risk management by PRMIA):

It is organized by PRMIA which was formed after GARP(which conducts FRM) split in 2002.

Exam: The syllabus of FRM and PRM as almost same. However PRM has some distinct advantages over FRM in terms of convenience. The entire coursework has been broken up into 4 sections. One can appear for all these sections together at one go, or appear for separate exams on different dates. This could be a huge advantage for working professionals hard-pressed for time. Also, PRM exams are held throughout the year. One can opt for days just like GRE and GMAT exams.

Preopartion: PRM handbook

PRM vs FRM:

Both the courses are equally reputed. Since FRM is older than PRM, it has a larger membership pool, but PRM seems to be catching up. PRM is supposed to be slightly more quantitative than FRM. PRM has its definite advantage as it is held throughout the year. But one problem for PRM is that the handbooks are not the best source of preparation(based on perception of actual exam-takers). Really, nothing much to choose between the two.

CFA vs FRM/PRM

This is one of the most debated questions in various blogs and forums. Heres my take:

CFA has a completely different focus than FRM/PRM. After your CFA charter, you are a finance generalist but generally people love getting into Investment management/I banks(ER not IBD) after their CFA. FRM/PRM have a risk focus. There are considerable overlap between CFA course and FRM/PRM but the same course is taught from valuation perspective in CFA but from a risk perspective in PRM/FRM. Many people have both certifications.

What should you opt for?

If you are one of those rare people who know exactly what field in finance you want to be , its not a tough decision.

If you just want to dive into finance just because of the kind of rewards it can give you, go for FRM/PRM first and then pursue CFA. Heres my reasoning:

Say you graduate in 2008 May. You will appear for CFA L1 in either December 2008 or June 2009. Results are out by Jan end/july end respectively. Assuming most of you will be in software/ manufacturing industry, CFA L1 will not give you a major boost.

Real benefits will come only after Level 2 , which will be held in June 2010.

However if you opt for FRM, you can appear for it in November 2008. results out on jan.

Since FRm/PRM are more specific courses, one can easily get a foot hold into the finance industry. You can then proceed to appear for CFA level1 in June 2009.

One option ( if you really are some geek god), appear for CFA L1 in dec 2008, go for CFA L2 in June 2009.

Bottomline: Given a typical fresh engineering graduates' circumstances, pursue FRM/PRM from a short-term goal of getting into the finance industry. Once there, explore what your interest areas are and then decide whether to go for CFA or another area of study.

Disclaimer: I repeat CFA and FRM/PRM cater to separate sets of financial professionals(with a bit of overlap of course). The aforementioned solution is relevant given the average Indian mindset of just getting a foothold into the ‘seemingly lucrative’ industry