Type of Market Risk Explained


📉 Market Risk Explained Simply: Types, Examples & Key Concepts

Market risk is not only about stock prices going down.
It includes changes in interest rates, equity prices, commodity prices, volatility, credit spreads, and correlations.
Ignoring these risks can lead to costly surprises.

Here’s a simple explanation of the main types of market risk 👇

1️⃣ Interest Rate Risk

Interest rate risk occurs when market interest rates change.
Fixed-rate bonds lose value when interest rates rise, while Floating Rate Notes (FRNs) remain relatively stable because their coupons adjust with market rates.

2️⃣ Equity Price Risk

Equity price risk refers to changes in stock prices.
If you buy shares (long position), you gain when prices rise and lose when they fall.
If you sell shares (short position), the risk works in reverse.
👉 Equity represents ownership in a company.

3️⃣ Commodity Price Risk

Commodity price risk affects assets like oil, gold, and agricultural products.
Prices fluctuate due to supply and demand, impacting producers, traders, and consumers.

4️⃣ Credit Price Risk (Different from Default Risk)

Credit price risk arises when bond prices change due to widening credit spreads, even if the company is financially stable and does not default.

5️⃣ Implied Volatility Risk

Implied volatility reflects market expectations of future price movement.
Options can gain or lose value even when the underlying price stays the same, simply because market expectations change.

6️⃣ Correlation Risk

Correlation risk occurs when investments move together.
If assets are highly correlated, diversification fails.
Low or negative correlation helps reduce overall portfolio risk.

📌 Key Takeaway

Market risk is multi-dimensional.
Price movement is just one part—interest rates, volatility, credit spreads, and correlation matter just as much.

#MarketRiskExplained #FRR #RiskManagement #FinanceBasics #Derivatives #FixedIncome #GARP #FRM #FinancialRisk&Regulation

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