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 Risk is the risk that ones investments will depreciate due to stock market dynamics causing one to lose money. ... Interest rate risk is the risk that the relative value of a security, especially a bond, will worsen due to an interest rate increase. ... Currency risk is a form of risk that arises from the change in price of one currency against another. ... This article or section does not cite its references or sources. ...

• 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 ones investment due to a change in a specific industry or sector, as opposed to a market-wide move. Definition In economics and finance, the Value at risk, or VaR, is a measure used to estimate how the value of an asset or of a portfolio of assets will decrease over a certain time period (usually over 1 day or 10 days) under usual conditions. ... In finance, a specific risk is a risk that affects a very small number of assets. ...

Use in annual reports of U.S. corporations

In the United States, a section on market risk is mandated by the SEC^[1] 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. SEC is a TLA which can refer to: In general context, an abbreviation for second. ... A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC) each year that is a comprehensive summary of a companys performance. ...

Risk management

All businesses take risks based on the two factors: the probability an adverse circumstance will come about and the cost of such adverse circumstance.^[2]

References

1. ^ FAQ on the United States SEC Market Disclosure Rules
2. ^ The analysis and management of risk

See also

• Credit risk
• Legal risk
• Liquidity risk
• Operational risk
• Risk modeling

Credit risk is the risk of loss due to a debtors non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). ... Legal and regulatory risk: Sometimes governments change the law in a way that adversely affects a banks position. ... Liquidity risk arises from situations in which a bank cannot sell an asset because nobody in the market wants to trade that asset. ... According to §644 of International Convergence of Capital Measurement and Capital Standards, known as Basel II, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. ... Risk modeling refers to the use of formal econometric techniques to determine the aggregate risk in a financial portfolio. ...

External links

• Managing market risks by forward pricing
• How hedge funds limit exposure to market risk