Flashcards in Part 2 - Market Risk Deck (7)
What is market risk caused by?
May negatively impact the firm's position / portfolio e.g. interest rate, asset liquidity
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
Name different types of market risk (8)
Basis (difference between spot price and the cash price)
Systematic (whole market)
How can systematic risk be reduced?
Can't be - risk remains even if portfolio is diversified.
Because factors affect the WHOLE MARKET
How can unsystematic risk be reduced?
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)