Market risk: Difference between revisions

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{{g}}{{a|security|}}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.
{{a|security|}}{{d|Market risk|/ˈmɑːkɪt rɪsk/|}}The risk that the [[financial product]] or [[underlier]] in which one has invested goes ''up'', if you want it to go down, or ''down'', if you want it to go up. Market risk is to be contrasted with [[credit risk]]: this is the risk that the counterparty with whom you have entered a transaction to take some market risk, cannot pay you the return your market risk has earned you, because it is ''broke''.


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


{{sa}}
{{sa}}
*[[Credit risk]]
*[[Credit risk]]

Revision as of 18:54, 28 November 2021

A word about credit risk mitigation


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Market risk
/ˈmɑːkɪt rɪsk/ ('.)
The risk that the financial product or underlier in which one has invested goes up, if you want it to go down, or down, if you want it to go up. Market risk is to be contrasted with credit risk: this is the risk that the counterparty with whom you have entered a transaction to take some market risk, cannot pay you the return your market risk has earned you, because it is broke.

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 horrified if her counterparty fails. Hence, initial margin and variation margin.

See also

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