Market risk is the risk taken on by banks, companies or investors that results from their performed operations and activities aimed at making profits. For example for banks and investors, the portfolio’s market risk is the result market making, dealing or taken positions with a bullish or bearish view in the underlying. Companies are exposed to market risk for example due to the fluctuations in oil prices or interest rates. Market risk in itself is not bad, however it should be managed thoroughly. If not, excessive risk taking can result in severe loss or even bankruptcy.
Market risk outline
Market risk can be measured as the fluctuation in asset values and income streams from assets. In what follows, we discuss concepts on value-at-risk, the optimal hedge ratio, the greeks, dynamic hedging, duration and convexity and show how they can be used to measure and manage market risk.