Market risk
From Wikipedia, the free encyclopedia
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.
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[edit] 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.
[edit] 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.
[edit] 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]
[edit] References
- ^ FAQ on the United States SEC Market Disclosure Rules
- ^ The analysis and management of risk
