Market Risks

It arises from movements in the level of market prices. It can be measured in two forms.

ü Absolute Risk

ü Relative Risk

Absolute Risk: It is measured in terms of relevant currency. It focuses on the movement of total return.

Relative Risk: It is measured in terms of related Bench Mark Index. It has emphasis on the deviation from index.

The market risk can be classified in to two following categories.

Ø Directional Risks

Ø Non-Directional Risks

Directional Risks: It involves exposures to the direction of movements in the financial variables, such as stock prices, interest rates, exchange rates & commodity prices. These exposures are measured by linear approximation such as beta for exposure to stock market movements.

Non-Directional Risks: It involves remaining risks, which consist of non-linear exposures to hedged position. Second order or quadratic exposures are measured by convexity when dealing with interest rates and gama when dealing with options.