Market risk: Difference between revisions
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Amwelladmin (talk | contribs) (Created page with "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...") |
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Revision as of 08:38, 17 May 2019
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 performance.
Market risk and credit risk are therefore, in many ways, pull in opposite directions. A swap counterparty 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 swap counterparty who is massively in-the-money will be most concerned if her counterparty fails. Hence initial margin and variation margin.