Hello, I am looking for someone to write an essay on Market Risk. It needs to be at least 2000 words.Download file to see previous pages... However, despite such innovation, risk management has not be

Hello, I am looking for someone to write an essay on Market Risk. It needs to be at least 2000 words.

Download file to see previous pages...

However, despite such innovation, risk management has not been able to prevent the distortions in markets as the use of sophisticated financial engineering methods have only contributed towards covering up the true nature and value of the economies.

The traditional tools of risk management group the overall risks run by financial institutions into market risk, credit risk, liquidity risk, operational risk, legal risk, business risk as well as strategic risk. Based on above broader categories different methods have been devised which measure the respective risks which can then be effectively managed through prudent risk management policies.

This paper will study the market risk and the developments which are taking place in market risk assessment methods due to changes in the economic conditions besides assessing their adequacy for current economic environment.

Market risk is the risk that the changes in the prices and rates prevailing in the market can reduce the dollar value of any security or portfolio of assets. Generally speaking, market risk can be broken down into two components i.e. the risk of the overall market that the prices or rates will generally fall or rise and the second element involves the market risk which specific to that particular security or assets i.e. the changes in prices or rates taking place solely due to individual characteristics of that particular asset. (Crouhy et.al, 2006).

Effectively, market risk is defined as the risk of incurring losses, which may be incurred from off and on-balance sheet items which arise due to changes in the prices in the market. Market risk is important for banks and other financial institutions because they hold different positions in financial instruments on their balance sheets. Carrying such financial instruments on balance sheet therefore put them under the risk of movements in the market prices. It is because of this unique nature of the market risk that the market risk is further split into sub categories of interest rate risk, equity position risk, foreign exchange risk and commodity position risk. It is however, important to note that all the sub-categories of market risk are not mutually exclusive as changes in one type of risk can potentially create or increase another risk.

Steps involved in market risk management

Before discussing the market risk assessment and different methods, it is critical that a comprehensive review of how the market risk is managed by the financial institutions.

The management of market risk is a very systematic process and involves different steps which needed to be taken so that the risk can effectively be managed. These steps are:

1. Risk Identification: any good risk management system must first have the capability to identify the risks as accurately as possible. Identification of the risks therefore involves accurately what are the different types of risks which are faced by the bank or financial institutions.

2. The next step involves the measurement of risk i.e. the employment of different market risk measurement models which effectively capture and measure the risk with better degree of accuracy and predictability.