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Traders, proprietary positioners, banks, investment banking firms, corporate treasurers, investors, portfolio managers and asset management firms are all subject to market risk. Market risk is the potential for an asset being reduced in value or the potential for a return to under perform its benchmark. Market risk can be present in the following arenas: interest rates, equity values, currency values and commodity values. Market risk management in macro terms is managing the risk/return associated with any market risk that is present. Individuals commissioned to take market risk or manage market risk must take into consideration the management objective governing their responsibilities, the markets to which they are exposed, the method of market risk taking, the time horizon for the subject market risk and the management principles that should guide their market risk management judgment. In the case of investment portfolio risk, the management process starts with addressing the underlying return objectives relative to a defined level of risk tolerance. Market risk can take many forms given the market arena in which the market risk is present. Understanding the nature of the market risk and an acceptable risk/return relative to the potential degree of market risk is critical to the market risk management thought process.
Market risk is probably the most significant type of risk that banks, asset management firms and investors face, but all corporations are exposed to market risk to some degree which can be minor or significant. Market risk can be very complex in nature and be one of the most difficult types of risk to manage. This presentation provides for a thorough understanding of market risk in terms of its nature, its types and the thought process for addressing it. It also provides for a review of market risk in the context of the manner in which traders, proprietary positioners, treasurers, investors and investment managers are exposed to market risk and how each must deal with it. It focuses on the management considerations of each of these parties and the market risk management thought process they must use to manage market risk relative to their roles and responsibilities. It offers a particularly detailed review of market risk considerations in the context of investments. It further addresses market risk in terms of derivative usage, leverage, hedging and the general management of market risk.