Market Risk Management: A Brief Discussion
by professor Eben Maré, University of Pretoria
Multibillion dollar losses in the financial markets over the last two decades have served to focus companies’ attention on management of market risks. In many cases these losses have arisen from new investment related product innovation or a mere misunderstanding of the risks inherent in a specific new business endeavour involving the financial markets. In this short note we shall aim to present the essential ideas underlying a market risk management programme.
Firstly, what is market risk? Market risk arises by virtue of our income statement or balance sheet changing in value as a result of changes in the values of traded securities, these typically being:
2. Foreign currency,
3. Interest rate(s),
5. Credit spreads,
6. Changes in volatilities on the above instruments or associated correlations.
It should be clear therefore that if we understand the market risks inherent in our company that we are placing ourselves in a position to hedge or mitigate these risks or even gear up on these risks!
Our total market risk management ethos consists of the following key
- Risk identification,
- Risk measurement,
We shall briefly elaborate on these elements below.