Market Risk
Market risk is one of the primary types of financial risk that businesses and investors face. It refers to the possibility that the value of investments or assets may fluctuate due to changes in market conditions, such as shifts in interest rates, exchange rates, or commodity prices.
Financial institutions, such as banks and investment firms, typically use a range of strategies to manage market risk, including diversification, hedging, and monitoring market conditions.
Investors also need to be aware of market risk when making investment decisions. By understanding the potential impact of market changes on their portfolios, they can make informed decisions about how to allocate their investments to minimize risk and maximize returns.
Overall, market risk is a critical component of financial risk management, and businesses and investors alike must carefully consider market conditions and take steps to mitigate the potential impact of market fluctuations on their investments and assets.
Market risk is the potential of loss arising from adverse changes in interest rates, foreign exchange prices, commodity and equity prices, credit spreads, and implied volatility levels for all assets and liabilities where options are transacted.
For the purposes of market risk management, the Group makes a distinction between traded and non-traded market risks. Traded market risks principally arise from the Group’s trading book activities within the Institutional Banking and Markets (IB&M) business.
The predominant non-traded market risk is interest rate risk in the Group’s banking book. Other non-traded market risks are liquidity risk, funding risk, structural foreign exchange risk arising from capital investments in offshore operations, non-traded equity price risk, market risk arising from the insurance business and residual value risk.
The Group uses Value-at-Risk (VaR) as one of the measures of traded and non-traded market risk. VaR measures potential loss using historically observed market volatility and correlation between different markets. The VaR measured for traded market risk uses 2 years of daily market movements. The VaR measure for non-traded banking book market risk is based on 6 years of daily market movement history.
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