Analyze and manage market risk
Market risk is the potential for a loss in value of an investment portfolio when prices drop due to sources of systematic risk, or changes in risk factors that affect the entire market or market segments.
Market risk is commonly measured and communicated as value-at-risk (VaR), or the amount of a portfolio that is at risk of loss over a specified timeframe. For example, for a one-month 5% VaR of $1 million in a portfolio, there is a 1 in 20 chance of losing $1 million over a month’s timeframe. Determining a portfolio’s VaR is a complex process. Many financial risk managers employ sophisticated models to analyze, rank, and decide on appropriate strategies for managing market risk.
Effective techniques for managing market risk include:
- Building customized risk models
- Performing Monte Carlo simulations
- Validating risk models using VaR Backtesting
- Analyzing various scenarios to assess risk exposure arising from financial activities exposed to market risks
For more information, see Financial Toolbox™, Financial Instruments Toolbox™, and Risk Management Toolbox™.
Examples and How To
See also: risk management, Monte Carlo simulation, liquidity risk, energy trading and risk management, backtesting, fraud analytics, portfolio optimization, conditional value-at-risk, Modelscape