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Concept
Market risk
Summary
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility.
There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most commonly used types of market risk are:
Equity risk, the risk that stock or stock indices (e.g. Euro Stoxx 50, etc.) prices or their implied volatility will change.
Interest rate risk, the risk that interest rates (e.g. Libor, Euribor, etc.) or their implied volatility will change.
Currency risk, the risk that foreign exchange rates (e.g. EUR/USD, EUR/GBP, etc.) or their implied volatility will change.
Commodity risk, the risk that commodity prices (e.g. corn, crude oil) or their implied volatility will change.
Margining risk results from uncertain future cash outflows due to margin calls covering adverse value changes of a given position.
Shape risk
Holding period risk
Basis risk
The capital requirement for market risk is addressed under a revised framework known as "Fundamental Review of the Trading Book" (FRTB).
All businesses take risks based on two factors: the probability an adverse circumstance will come about and the cost of such adverse circumstance.
Risk management is then the study of how to control risks and balance the possibility of gains.
For a discussion of the practice of (market) risk management in banks, investment firms, and corporates more generally see .
As with other forms of risk, the potential loss amount due to market risk may be measured in several ways or conventions. Traditionally, one convention is to use value at risk (VaR). The conventions of using VaR are well established and accepted in the short-term risk management practice.
However, VaR contains a number of limiting assumptions that constrain its accuracy. The first assumption is that the composition of the portfolio measured remains unchanged over the specified period. Over short time horizons, this limiting assumption is often regarded as reasonable.
Official source
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