Definition of Market Risk

Market risk is the potential for losses in investments due to changes in market prices. It is also known as systematic risk, and it affects all investments in a given market. Market risk is caused by factors such as economic conditions, political events, natural disasters, and other external forces that can affect the value of an investment.

Types of Market Risk

There are several types of market risk that investors should be aware of. These include interest rate risk, currency risk, commodity price risk, and equity price risk. Interest rate risk is the potential for losses due to changes in interest rates. Currency risk is the potential for losses due to changes in exchange rates between two currencies. Commodity price risk is the potential for losses due to changes in the prices of commodities such as oil or gold. Equity price risk is the potential for losses due to changes in stock prices.

Managing Market Risk

Investors can manage their exposure to market risk by diversifying their investments across different asset classes and markets. This helps to reduce the overall level of risk by spreading it out over a larger number of investments. Investors can also use hedging strategies such as options and futures contracts to protect against losses from market movements. Finally, investors should monitor their investments closely and adjust their portfolios when necessary.