Market risk Essay Example | Topics and Well Written Essays - 2500 words

Market risk - Essay Example Even with the Security exchange commission, Federal Reserve still does not grantee immunization from the insecurity that comes with risk. FI’s have faced difficulties over the years for a multitude of reasons; the major cause of serious FI problems remains directly related to lax credit standards. These problems range from borrowers, counter-parties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances. These lapses in awareness can lead to decline in the credit standing of an FI’s counterparties. This experience is common in both G-10 and non-G-10 countries (Basel 1999). When discussing market risk there are many trading activities that have caught the eyes of regulators by FI managers. For example, in September 1995, a leading Japanese bank, Daiwa Bank was forced into insolvency because of losses trading in Japanese stock futures that took place at a branch in New York City (Saunders & Cornett, pp 258). Market risk can b e define as the risk related to the uncertainty of an FI’s earning on its trading portfolio caused by changes in market conditions, such as price of an asset, interest rates, market volatility, and market liquidity (J.P. Morgan). Understanding what is at risk when trading and investing on the market is of great interest to FI managers. There are divergent types of portfolio’s, which can be distinguished on a basis of time, horizon and liquidity. Trading portfolio consists of assets, liabilities, and derivative contracts that can be bought and sold quickly on organized financial markets. The category of asset or liabilities in a trading portfolio could be a long or short position in commodities, foreign exchange, equity securities, interest rate swaps, and options (Saunders & Cornett, pp 258). The investment portfolio has assets and liabilities that are moderately illiquid and held for longer holding periods. The variety of assets and