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Flashcards in Part 2 - Market Risk Deck (7)
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1

What is market risk caused by?

Market changes
May negatively impact the firm's position / portfolio e.g. interest rate, asset liquidity

2

How is market risk controlled?

Tactically and strategically

Using metrics e.g. the 'Greeks' - measure asset sensitivity to market changes

Alpha - measure of risk

Beta - level of volatility of a share against the market as a whole

3

Name different types of market risk (8)

Price level
Commodity
Basis (difference between spot price and the cash price)
Volatility
Liquidity
Currency
Interest Rate
Systematic (whole market)

4

How can systematic risk be reduced?

Can't be - risk remains even if portfolio is diversified.
Because factors affect the WHOLE MARKET

5

How can unsystematic risk be reduced?

By diversification

6

How can market risk be mitigated?

- Understand the market
- Apply independence on pricing
- Mark to model if mark to market not available
- Hedging offsets/mitigates a risk in taking a position
- Ensure policy and procedures in place
- Use various instruments (e.g. insurance policies / swaps / options / derivatives)

7

What is market risk?

Risk that the VALUE of a market position or investment portfolio will DECREASE due to the change in value of the market risk factors