What Do You Know About Market Risk?

Market risk is a risk which arises due to the changes in the market prices. Most of the Banks which are active in international trade and work in volatile domestic economies face this risk to a great extent.

Every Bank carry with it different assets and liabilities whether on balance sheet or off balance sheets which may put a bank under great stress if prices of these assets move in unfavorable position and bank may sustain huge losses and may be forced out of the business. Therefore, Market risk is one of the most important risks to manage by the bank.

Banks use different techniques to manage this risk like interest rate ladders; VAR models etc are few of the latest tools that are being employed by the banks to manage the Market risk.

Market Risk can be arising in following areas of business:

1) Market Risk in Equities
2) Market Risk in Commodity trading
3) Foreign Exchange Risk

Risk in equities arises due to changes in the prevailing interest rates in the economy whereas risk in commodity trading also arises due to changes in the prices of the commodities if banks are actively trading in commodities.
Foreign Exchange Risk arises due to changes in the foreign exchange rates.