Market risk

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The risk in a financial product that the investment or underlier in question goes up or down. Contrast this with the credit risk of an instrument, which is the risk that your counterparty doesn’t pay you the spectacular performance of your financial product.

Market risk and credit risk therefore, in many ways, pull in opposite directions. A fellow who is taking a bath from a market risk perspective won’t be too fussed if his counterparty fails (and given the flawed asset provisions of Section 2(a)(iii) might actually quite like that idea); a lady who is massively in-the-money will be most concerned if her counterparty fails. Hence, initial margin and variation margin.

See also

• Credit risk