Financial Risk Management

Financial Risk Management is an elective segment offered in the CPA Program professional level.

The deregulation of financial markets, the lifting of exchange controls and the motivation to capture international markets has meant that organisations must operate within a volatile global environment. These organisations are vulnerable to financial risk that may result from interest rate, exchange rate or commodity price movements. The purpose of this segment is to equip candidates with the necessary skills to assess these financial risks and manage them strategically with the use of financial instruments.

The Financial Risk Management segment extends the governance framework covered in the Ethics and Governance segment, further discusses the process of investment evaluation that was covered in the Strategic Management Accounting segment. It examines some of the practical elements and complexities of hedge accounting in relation to international financial reporting standards that were covered in the Financial Reporting segment.

Segment aims

The aims of this segment are: 

• to ensure candidates are aware of the financial risks facing organisations
• to implement appropriate financial risk management strategies to address an organisation's financial risk

General objectives

On completion of this segment, candidates should be able to:

• identify the types of financial risks faced by an organisation
• provide strategic advice about the types of financial instruments that could be used to best manage an organisation's financial risks
• analyse the procurement and management of funding and the allocation to competing long term investments
• demonstrate the practical elements of accounting for derivatives, both embedded derivatives and derivatives used for hedging purposes
• explain a practical risk management approach and control framework to manage both financial and operational risks

Segment content

Module 1: Introduction to financial risk management

Module 1 presents an introduction to the financial risk facing organisations and the risk management process used to address financial risk. The methodology and concepts introduced in this module will be expanded upon throughout the segment.

Contents:

• Introduction to risk
• Financial markets and instruments
• The framework for financial risk management
• Operational financial risk management

Module 2: Sourcing and management of debt and equity funds

This module examines the procedures involved in liquidity and working capital management. The various debt and equity markets are explained with reference to organisational funding needs and suitability. The ASX listing requirements are also discussed.

Contents:

• Cash flow management
• Working capital management
• Sources of funds for business
• Appropriate funding for business types
• Legal requirements for raising funds from the public

Module 3: Investment evaluation and capital structure

Module 3 develops a risk manager’s understanding of capital budgeting techniques and how an organisation should allocate its funds to competing long-term investment opportunities. Also discussed is the cost of capital and funding mix required to ensure the organisation’s activities are financed at an acceptable cost with a managed level of risk.

Contents:

• Capital budgeting techniques
• Cost of capital and capital structure
• Additional issues in capital budgeting

Module 4: Derivatives

An organisation’s financial risk can be managed with the use of financial instruments such as forwards, futures, swaps and options. These derivative products can be used to alter both the nature and timing of interest rate, foreign exchange and commodity price exposures. This module introduces the main types of derivatives and the associated benefits and drawbacks of each. The strategic application of these financial instruments to interest rate risk is covered in Module 6, and to foreign exchange and commodity price risk in Module 7.

Contents:

• Forwards
• Futures
• Swaps
• Options
• Exotic derivatives and hybrids
• Derivatives on other risks

Module 5: Introduction to accounting for derivatives and hedge relationships

This module discusses the requirements of some of the international accounting standards as they apply to derivatives and hedge relationships and the interaction between the standards regarding foreign exchange hedge relationships. Some of the practical aspects of hedge accounting are discussed and some of the complexities explored.

Contents:

• Accounting concepts
• Hedge accounting  

Module 6: Interest rate risk management

Strategic and operational interest rate risk management is a core skill of a corporate risk manager. The global financial crisis of 2007–09 resulted in many corporate failures, and management can no longer claim ignorance of the dangers inherent in exposure to interest rate volatility or of the techniques for its management. This module explores the fundamental processes of interest rate risk management and its interrelationship with liquidity management and solvency.

Contents:

• Background to interest rate risk management 
• Identification of interest rate risk
• Analysis of interest rate risk 
• Management of interest rate risk 
• Accounting and controls associated with interest rate risk

Module 7: Foreign exchange and commodity risk management

Strategic and operational foreign exchange and commodity risk management is also a core skill of a corporate risk manager. The key drivers that affect currencies and commodity prices are examined and the organisation’s exposure determined. Strategic management of these exposures is achieved through the use of financial instruments and best practice risk management.

Contents:

• De-mystifying foreign exchange
• Foreign exchange risk management
• Background to commodity risk
• Soft commodities
• Base metals
• Energy
• Precious metals – Gold risk management

Module 8: Controlling risks

This module discusses the implementation of a risk management framework and associated controls to manage financial risks and the associated operational risks to which an organisation may be exposed. The key risk management principles are explored, including the roles and responsibilities of senior executives.

Contents:

• Culture of financial risk management
• Impact of the global financial crisis
• Risk management framework
• Internal control framework
• Governance framework over financial risk management
• Operational risks
• Accounting disclosure requirements