Market risk
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Market risk is the risk that the value of an investment will decrease due to moves in market factors. The four standard market risk factors are:
- Equity risk, or the risk that stock prices will change.
- Interest rate risk, or the risk that interest rates will change.
- Currency risk, or the risk that foreign exchange rates will change.
- Commodity risk, or the risk that commodity prices (i.e. grains, metals, etc.) will change.
Sometimes, a fifth risk factor is also considered:
- Equity index risk, or the risk that stock or other index prices will change.
Measuring
Market risk is typically measured using a Value at Risk methodology. Market risk can also be contrasted with Specific risk, which measures the risk of a decrease in one's investment due to a change in a specific industry or sector, as opposed to a market-wide move.
Notes on Market Risk for banks can be downloaded from www.nalin.ca
Use in annual reports
A section on market risk is mandated by the SEC in all annual reports submitted on Form 10-K. The company must detail how its own results may depend directly on financial markets. This is designed to show, for example, an investor who believes he is investing in a normal milk company, that the company is in fact also carrying out non-dairy activities such as investing in complex derivatives or foreign exchange futures.
See also
da:Markedsrisiko de:Marktrisiko fr:Risque de marché ru:Рыночный риск zh:市場風險