What Is the FRM Exam and How Do You Prepare for It?

The Financial Risk Manager (FRM) exam is a globally recognized certification for professionals specializing in risk management. As financial markets grow more complex, the demand for skilled risk managers has increased, making the FRM certification highly sought after.

Levels of the FRM Exam

The FRM exam consists of two levels, each testing a candidate’s understanding of risk management concepts and their practical application. Level I focuses on foundational tools and techniques, including quantitative analysis, financial markets, and products. Key topics include value-at-risk (VaR) models, which assess potential portfolio losses.

Level II delves into advanced risk management strategies, such as stress testing and scenario analysis. It includes topics like credit risk measurement, operational risk, and the Basel Accords, which establish international banking regulations.

Eligibility and Registration

Candidates should have a solid background in finance and risk management. To register, create an account with the Global Association of Risk Professionals (GARP), select a preferred exam date and location, and pay the required fees. The exam is offered twice a year, in May and November. Early registration reduces costs, with fees ranging from $550 to $750, along with a $400 enrollment fee. Additional expenses may include study materials and travel.

Exam Structure and Format

The FRM exam is predominantly multiple-choice and tests both theoretical knowledge and practical skills. Part I consists of 100 questions covering foundational concepts, such as risk models and quantitative analysis, completed in four hours. Part II features 80 questions on advanced topics, also within a four-hour timeframe, emphasizing analytical skills in complex scenarios.

Curriculum Highlights

The FRM curriculum spans a wide range of risk management topics, preparing candidates for the challenges of modern financial environments.

Quantitative Tools

This section covers statistical and mathematical techniques essential for financial risk assessment, including probability distributions, hypothesis testing, and regression analysis. These tools are critical for developing predictive models and assessing risk exposure.

Market Risk

Market risk topics include interest rate risk, equity price risk, currency risk, and commodity price risk. Candidates learn to apply models such as the Capital Asset Pricing Model (CAPM) and the Black-Scholes model and use derivatives for risk mitigation.

Credit Risk

Credit risk focuses on the potential loss from a borrower’s inability to meet obligations. Candidates study credit scoring models, credit default swaps (CDS), and the Basel Accords’ regulatory framework for managing credit risk.

Operational Risk

Operational risk examines losses stemming from failed processes, systems, people, or external events. Candidates learn about frameworks like COSO and key risk indicators (KRIs) for monitoring and mitigating operational risk.

Other Risk Categories

Additional topics include liquidity risk, legal risk, and reputational risk. Candidates explore techniques for managing liquidity issues, ensuring legal compliance, and safeguarding an organization’s reputation.

Scoring and Retake Process

The FRM exam uses a relative scoring system, comparing candidates’ performance to their peers. Results are divided into quartiles for each topic area. GARP does not disclose a specific passing score, but candidates must demonstrate a solid understanding of the material. Results are released six weeks after the exam, with a pass or fail designation and a quartile performance breakdown.

Candidates can retake the exam as needed, with no limit on attempts. Each attempt requires re-registration and payment of the exam fee. Passing Part I is a prerequisite for attempting Part II, and candidates do not need to retake Part I after passing. The quartile performance report helps identify areas for improvement in future attempts.