The practice of mitigating financial risk by analyzing data. Risk managers assess the financial risks of individual investments to control or reduce the risks of making the investment. The risk manager examines potential investments for specific signs of risk. Some risks looked for include defaults on loans, financial overextensions, recent losses due to business or investment activities, currency risks, commodity price changes and overextension in the invested company. Once risks are identified and classified according to level of risk to the client, the manager prepares a report for the client. If the investment is made, the manager uses financial instruments to serve as hedges against the risk to reduce potential investment losses. These instruments include credit default swaps, futures and options contracts or insurance policies.
Risk managers work for a single organization or for individual clients. Risk managers also perform defensive risk analysis on their client. The manager analyzes the client for weak areas that can be covered using the same tools used to hedge against investing risk. The manager then advises the clients on methods to cover the risk according to the risk severity.
Educational requirements for risk management include a bachelor's degree in accounting or a business degree with courses in management science, statistics and financial modeling. An MBA is also useful. Employers may also require certifications as a Financial Risk Manager (FRM) or Professional Risk Manager (PRM). Both certifications require testing in financial markets, methods of risk management, ethics and creating risk management models, and exam preparation may take up to a year. Experience in accounting, law, compliance or within financial services is helpful in gathering the skills and knowledge necessary for risk management.