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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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{{a|security|}}{{d|Market risk|/ˈmɑːkɪt rɪsk/|n|}} | |||
Market risk and credit risk | The risk that the asset, investment, product or [[underlier]] in which you have invested goes ''up'' when you want it to go ''down'', or ''down'' when you want it to go ''up''. | ||
Market risk can be contrasted with [[credit risk]]: 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]] on his ''market'' risk won’t be too fussed if {{sex|his}} [[counterparty]] blows up (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}} | ||
*[[Variation margin creates more problems than it solves]] | |||
*[[Credit risk]] | *[[Credit risk]] | ||