Market Risk

Analyze and manage market risks

Market risk is the potential for a loss in value of an investment portfolio when prices drop due to sources of systematic risk, or changes in risk factors that affect the entire market or market segments.

Market risk is commonly measured and communicated as Value at Risk (VaR), or the amount of a portfolio that is at risk of loss over a specified timeframe. For example, for a one-month 5% VaR of $1 million in a portfolio, there is a 1 in 20 chance of losing $1 million over a month’s timeframe. Determining a portfolio’s VaR is a complex process. Many financial risk managers employ sophisticated models to analyze, rank, and decide on appropriate strategies for managing market risk.

Effective techniques for managing market risk include building customized models, performing Monte Carlo simulations, and analyzing various scenarios to assess risk exposure arising from financial activities exposed to market risks.

For more information, see Financial Toolbox.

Examples and How To

Software Reference

See also: risk management, Monte Carlo simulation, liquidity risk, energy trading and risk management, credit derivatives