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

The primary objective of this segment is to illustrate some of the main financial risk management techniques. Financial Risk Management is concerned with the management of various risks in an organisation, the acquisition of funds, investment evaluation and the application of hedging instruments. Candidates are introduced to various financial instruments that can be used to manage an organisation's risk.

Some knowledge of financial mathematics, business finance concepts and accounting standards is assumed. The segment material is cumulative, therefore, candidates will gain the most from the materials by working progressively through the study guide.

The content of the Financial Risk Management segment is as follows:

Module 1: Introduction to financial risk management and accounting for financial instruments

• introduction to risk
• cash flow management and shareholder value
• introduction to risk management
• derivative products
• responsibilities for risk management

Module 2: Sourcing and management of funds

• cash flow management
  • liquidity
  • cash flow forecast
  • cash disbursements
  • free cash flow
• working capital management
  • strategies to manage working capital
  • measuring working capital requirements
• sources of funds for business
  • money market instruments
  • other sources of short-term and intermediate-term finance
  • long-term debt financing
  • US and global fundraising
  • equity financing
  • hybrid securities
• appropriate funding for business types
  • sole trader
  • partnerships
  • corporations
• legal requirements for raising funds from the public

Module 3: Investment evaluation and capital structure

• capital budgeting
  • accounting rate of return
  • payback period method
  • net present value
  • internal rate of return
  • NPV and IRR compared
  • projects with different lives
• cost of capital and capital structure
  • qualitative factors
  • quantitative factors
• weighted average cost of capital
• additional issues in capital budgeting
  • estimating cash flows
  • inflation and capital budgeting
  • WACC with taxes
  • projects of different risk

Module 4: Introduction to accounting for financial instruments (including derivatives)

• accounting for financial instruments
  • summary of accounting approach to financial instruments
  • measurement and recognition of financial liabilities
  • de-recognition of financial assets and liabilities
• hedge accounting
  • background to accounting rules around hedging
  • the hedged item
  • the hedged risks
  • cash flow hedge
  • accounting for fair value hedges
  • accounting for hedges of net invetments in a foreign operation
  • hedge effectiveness
  • hedge documentation

Module 5: Interest rate risk management

• types of interest rate risk management products
• identification of interest rate risk
• quantification of interest rate risk
  • determining the potential impact of interest rate movements
  • scenario analysis
• management of interest rate risk
  • interest rate risk management techniques

Module 6: Foreign exchange and commodity risk management

• background on foreign exchange
• foreign exchange exposures
• introduction to foreign exchange market practice
• best practice foreign exchange and commodity risk management
• risk management for importers and exporters
  • hedging with forward exchange contracts and options
• currency option pricing
• commodity risk
• gold risk management
  • implementing risk management strategies

Module 7: Risks and controls

• risks of using derivatives
• external governance / regulatory issues
  • control environment
  • establishment of a SOX-compliant environment
  • process for SOX risk and control matrices
• governance framework over financial risk management
  • financial risk management policy: structure, key risks and controls
  • scope and content of board reports