Market risk: Difference between revisions

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 horrified if {{sex|her}} [[counterparty]] fails. Hence, [[initial margin]] and [[variation margin]].