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MARKET RISK

What is Market Risk :

The Bank for International Settlements (BIS) defines market risk as “ the risk that the value of ‘on’ or ‘off’ balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices”.  Thus, we can say that Market Risk is the possibility of loss to a bank caused by changes in the market variables

Market Risk is thus the risk to the bank’s earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities of those changes.

Market Risk, is usually further categorized into

1. interest rate risk,

2. foreign exchange risk,

3. commodity price risk and

4. equity price risk.

What is effective  Market Risk Management :

An effective market risk management in a bank comprises of

• risk identification,

• setting up of limits and triggers,

•  risk monitoring,

• models of analysis that value positions or measure market risk,

• risk reporting, etc.