The Pulse of the Market: Understanding Market Risk within FRM® Course

Welcome back learners! In this blog post we are going to learn and understand about Market Risk in the FRM ® Course curriculum .

What is FRM® Course?

FRM stands for Financial Risk Manager; so, as the term suggests this course is all about in depth study of Risk Management. This designation is offered by GARP i.e., Global Association of Risk Professionals .

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What is a Market Risk?

Market risk is also known as systematic risk. Defining market risk into simpler terms means it is a loss on investment. A few elements such as market volatility, price volatility, continuous market fluctuations etc. affect the financial market negatively. Investors should keep in mind that market risk isn’t subject to affect a particular industry, but it is going to affect everyone as a whole. Breaking this down says inflation rates go high which is very generic. It will be affecting all the industries and every single being very much; hope that was simple to understand. Another way of putting this is to change into legal rules & regulations by the government which will surely force everyone to change it’s that simple.

Types of Market Risk

1. Interest Rate Risk

Interest Rates are very volatile in the market depending on the increase or decrease in interest rate risk. Majorly this affects the fixed income securities i.e., bonds.

2. Commodity Risk

As the term says “commodity”, it basically means change of prices of basic commodities. This can in turn lead to negative market fluctuations.

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3. Currency Risk

Firstly, currency risk is also known as exchange rate risk. Now what happens here is when there are fluctuations of currency globally it would affect one’s investments. So, if someone invests in foreign currency denominated assets, they would be very much affected.

4. Country Risk

When making an international investment decision one should be well informed about the market fluctuations there which will in turn be beneficial for them to decide whether international investments are feasible if yes then after how long that can be achieved if not then what are the other options available. There are other variables to consider while making international investments one should do their own research & do the needful.

Managing Market Risk

1. Diversification

This is the simplest concept to understand which states to disperse the investments into various other sectors in order to minimize risk. If diversification is done in the correct way, then the percentage of facing market risk can be manageable obviously it won’t decrease but with the correct tactics one can surely manage it.

2. Hedging

Hedging seems like a complicated concept, but it is still easy to understand and if practiced wisely one can surely benefit from this. First things first hedging helps one to minimize loss. Now you might be wondering how that can be done well, say if you have a share and the price decreases you have to buy a financial product called options; options would allow you to sell your shares at a specific price even if the market falls below that. You shouldn’t opt for options when the share price is high as you can benefit from the increased value of the share.

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3. Asset Allocation

Asset Allocation is dispersing your investments into various asset classes such as; mix of stocks, bonds, and cash or money market securities. Other metrics to consider here are investor’s risk tolerance, time horizon, and financial goals.

4. Stop-Loss Orders

A stop-loss order is a directive that instructs a broker to automatically sell a stock if its price falls below a predetermined threshold, which is referred to as the “stop price.”

5. Stress Testing and Scenario Analysis

As the name suggests, this is all about creating a hypothetical market situation in order to notice how the portfolio would function.

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6. Using Low-Volatility Investments

The term itself is quite simple to understand; what it means is making investments into the low volatility investments as it is subject to market fluctuations but there will be very less fluctuations as compared to others which in turn would provide a stable return overtime.

7. Stay informed

One needs to be updated about the market i.e., the fluctuations, the changes in order to be able to buy, sell & hold the stocks. Obviously, this won’t help one with predicting what exactly is going to happen but at least being updated will help one a lot.

8. Wait it out

As the name of the concept suggests that one shouldn’t panic if the value of the stock falls. Minor market fluctuations may have only transient effects on your accounts, which will be able to withstand over time. Before selling, consider the market’s general patterns and if you can afford to keep onto a long-term investment.

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FRM® Course by EduPristine

EduPristine offers the Financial Risk Manager® (FRM®) Course which is administered by the Global Association of Risk Professionals (GARP) . EduPristine provides both Classroom Training (in Mumbai) & Live Virtual Classes (Online) at no extra cost along with soft skills training & placement assistance. Alongside EduPristine provides practical & experiential learning. Here we have excellent faculty i.e., industry experts to teach you. You can even go through the testimonials or FRM course review provided by the learners.

Conclusion:

So here we come to the end of this blog post. Hope you now have a basic understanding of the market risk in the FRM® Course. If you’re eager to know more about the FRM® course details, FRM® course fees, FRM® course duration, FRM® course eligibility, FRM® course syllabus & how to apply for FRM® course connect with the EduPristine team ASAP on the handles mentioned below. See you in our next blog post until then keep learning, keep growing.