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Market risk: concept, form, risk management

The assertion that any business activity is fraught with risk is not doubted by any entrepreneur.

While engaged in production, trade or rendering services, managers of companies and firms are guided by a market system dictating specific laws, rules, the concept of norm and competition. With complete certainty and confidence, it is simply impossible to calculate the functioning of economic systems.

The importance of sound risk management

The process of making managerial decisions of different scale (from everyday local significance to strategic and vital for the organization) is influenced by a large number of different factors and conditions. Predicting for certain this or that outcome of the situation is hindered by the uncertainty, which is expressed in the lack of information, data, and also in the impact of the randomness factor.

A kind of economic uncertainty is the risk. This phenomenon is inherent in most spheres of human activity. Today, employees who can research, forecast and analyze risks are considered extremely important for the successful operation of the enterprise. The volume of profit, competitiveness and survival of a firm largely depends on the ability of its managers to predict the consequences of an action.

Analyze market financial risks are trusted by specialists who have sufficient experience and qualifications. The task of such a manager is to ensure the protection of assets and profits of the company from losses incurred as a result of changes and fluctuations in interest rates, exchange rates and other economic and financial phenomena.

What is risk: concept, characteristic

Risk refers to the situation associated with the existence of a certain choice between several putative alternatives. The onset of a risky event entails both a positive and a negative result.

In other words, risk is the possibility of the onset of success or failure. This concept should be distinguished from uncertainty, since the risk can be estimated, and its influence is measurable.

Signs of a risk situation:

  • There is uncertainty.
  • There is an opportunity to choose an alternative option of actions (one of them is the rejection of the choice).
  • You can evaluate the existing alternatives.

The most important property of risk, which allows the leader to take timely actions to reduce the negative impact of individual factors, is the probability. This term means a mathematical assessment of the situation. The probability reflects the calculation of the frequency of occurrence of a given result. Such an assessment can be made only if there is sufficient statistical information (data, indicators, expert estimates and forecasts).

Market risk: features, types and specifics

The situation in which the characteristics of an economic state of an object due to the operation of market factors may not correspond to the expectations of decision makers is what constitutes a market risk.

From other types of banking risk, such situations differ in that they are directly influenced by market conditions. The types of market include interest rate risk, as well as stock and currency.

Risk for different types of organizations

The impact of risk-based situations on the activities of any enterprise is enormous, so their ignoring or insufficiently thorough research can lead to losses and even the collapse of the company. Market risk is a characteristic of the most important economic markets, for which a change in interest rates is of great importance. This is the market of debt securities, stocks, currencies, goods.

This category of risks reflects the possibility of losses (losses of finance) of credit institutions due to the fact that the price of financial instruments in the market has changed or the exchange rates fluctuate. Also this category of risk reflects the possibility of occurrence of profit or loss of the trade organization in case of price changes.

For banks, interest rate risk becomes the most significant, since it directly affects the final result of the activity. It is expressed in the possibility of increasing or reducing the value of assets of a banking organization due to fluctuations in interest rates on deposits and loans.

The importance of risk for investors

In assessing the economic effectiveness of future investments, each investor is interested in obtaining objective and reliable data on the degree of risk of a particular project.

He has a certain expected range of return on the portfolio of securities, and the possibility that the actual profit will exceed the limits of this interval, and there is a market risk.

That is, it is the existence of the probability of obtaining loss, loss or shortfall in profits. Losses accompanying the implementation of economic activity are material, labor and financial. Market financial risks have their gradation, according to which the most highly profitable variants of capital investments become, as a rule, extremely risky. Sometimes so that investors decide not to deal with them, because "the game is not worth the candle."

Why are there risky situations?

Often, in the formation of situations involving risk, external and internal causes are involved.

Internal causes of market risk are:

  1. Intentional opposition. For example, the acquisition or sale of a certain category of financial instruments.
  2. Wrong actions of managers when making managerial decisions. This can be the acquisition or sale of shares, bonds, currency, as well as errors in the number and duration of these manipulations.

External causes that form risk-containing situations, it is customary to consider:

  1. Unfavorable change in the value of financial instruments due to events occurring with the issuer, and the general state of the market (affects the stock risk).
  2. Fluctuations in the prices of precious metals.
  3. Use of a large number of specific financial instruments (bonds, loans, mortgage loans), which may not be repaid on time.
  4. Sharply changing exchange rates.
  5. Cases when customers and counterparties do not comply with the terms of contracts.

What does "market risk assessment" mean?

In order to protect the company from the unpredictable impact of risk-containing situations, the market risk is assessed and analyzed.

The main purpose of these actions is to support the company's risk in the framework that is taken into account when setting strategic objectives. This is necessary to preserve assets and capital, as well as to reduce or eliminate losses.

Analyze all types of risks that are important for the activities of the enterprise (currency, commodity risk, and others).

Stages of management of market risk

After defining the purpose, principles and methods of risk management, specialists proceed to the following actions:

  • Identify market risk.
  • Assess the degree of its influence and the level of probability.
  • Monitor market risk.
  • They take measures aimed at controlling and minimizing the risk.

The main problem for specialists involved in risk assessment and management is the absence of any universal prescriptions. Each situation and question are unique and require an individual approach. Therefore, along with the qualifications, experience and professionalism of managers, qualities such as intuition and flexibility of thinking are necessary.

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