From the course: Introduction to Risk Management

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Market risk

Market risk

From the course: Introduction to Risk Management

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Market risk

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- [Instructor] Okay, if you're ready, let's get into some specific examples of risks in banking, and let's start by exploring market risk. Banks, especially investment banks or universal banks with investment banking divisions, often own financial instruments like stocks and bonds and derivative contracts for relatively short periods of time to help them with their day-to-day business. An investment bank might buy and sell Apple shares or US Treasury bonds to its clients. They would describe the service as being a market maker. They will need an inventory of Apple shares and US Treasury bonds to do this, just like an electronics store needs computers and tablets to sell to their customers. Banks record the value of these financial assets on their balance sheets. Financial assets are valued every day in a process called marketing to market. Market risk is the uncertainty banks face due to movements inn commodity prices, equity prices, interest rates, credit spreads, and foreign…

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