Market Risk

The loss arising from changes in the value of the asset.
There are four main types of market risk


Interest Rate

Interest rate risk is the risk that the value of a security will fall as a result of changes in interest rates.
Interest rate products often have different bases such as the LIBOR versus the US prime rate and these will often move at different rates or in different directions.
Other products may reprice at different times and rates. For instance, a loan with a variable rate will generate more interest income when rates rise and less interest income when rates fall. If the loan is funded with fixed rated deposits, the bank's interest margin will fluctuate.
Yield curve risk is presented by differences between short-term and long-term interest rates. Short-term rates are usually lower than long-term rates so borrowing short-term and investing long-term can often be a good investment
Option risk is difficult to measure and control.



Equity

Equity price risk refers to the risk arising from the volatility in the stock prices.
Systematic risk refers to the risk due to general market factors and affects the entire industry. It cannot be diversified away
Unsystematic risk is the risk specific to a company that arises due to the company specific characteristics. According to portfolio theory, this risk can be eliminated through diversification.



Commodity

Commodity Price Risk refers to the risk of unexpected changes in a commodity price, such as the price of oil.



Foreign Exchange

Currency risk arises because of the fluctuations in the currency exchange rates.






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