Market Risk
Market risk is the risk of losses resulting from adverse movements in market prices such as interest rates, exchange rates, or equity prices.
Meaning in Practice
In practice, market risk affects trading portfolios and investment holdings. It arises from fluctuations in bond yields, stock prices, commodity prices, and foreign exchange rates. Financial institutions use models and hedging strategies to measure and manage this risk.
Why It Matters
Significant market movements can quickly erode capital and profitability. Effective market risk management is essential to maintain financial resilience and regulatory compliance. Poor controls may amplify systemic volatility.
Market Impact
High market volatility increases trading losses and risk premiums. Investors may demand higher returns to compensate for uncertainty. Central bank actions and macroeconomic data often influence market risk levels.
Example
A sudden rise in interest rates reduces the market value of a bank’s bond portfolio, generating unrealized losses and affecting capital ratios.