Market Risk

Market Risk

Introduction

In banking sector, analyzing risk factors is very important both for mid-level management and top management of the banks. Mostly, two types of uncertainties arise in banking system; the first one is credit risk, which arises when loans are not repaid and the second one is market risk, which arises due to price fluctuations in the market. Market Risk can be defined as an a risk associated with uncertainly of earnings on trading portfolio and investment portfolio due to extreme changes in various market factors such as volatility, asset prices, interest rates and market liquidity. The associated market risk can be classified into 4 types. They are: 1. Equity Risk; 2. Currency Risk; 3. Interest Rate Risk; 4. Commodity Risk (Dorfman, 1997). Market risk, primarily, emphasizes the risks associated with short-term investments that deal with assets, liabilities and derivatives. Most of the long-term investments such as retail deposits and hedge funds and commercial loans will not be influenced by market risk. The aim of the research paper, Market Risk, is aimed to investigate market risk factors in American Banking system. This paper analyses how liquidity risk, interest rate risk, foreign exchange risk and country risk affect American banking market.

The word risk is derived from a Latin word called Rescum. In banking terms, the market risk can be defined as a possibility of loss to a bank due to changes in market conditions or variables. Majorly, market risk affects a bank's earnings in the form of movements in interest rates, commodity prices, and current exchange rates (Dorfman, 1997).