Market risk

As the market risk, market risk or market price risk refers to the risk of financial loss due to the change in market prices ( eg stock prices, interest rates, exchange rates or raw materials ).

In portfolio theory the market risk is the systematic risk (see below).


Depending on the causative parameter is different to equity price risk, interest rate risk ( see also rate risk ), foreign exchange risk, etc.

Stock price and interest rate risks are often further subdivided based on the portfolio theory and prudential regulations in general and special risks. Under general market price risk is the risk of loss that results from a movement of the market under consideration as a whole. For German stocks this would be, for example, the danger of a general price decline, which would be measured, for example, the decline in the DAX index. The specific market risk, however, stirred (eg, a single share price ) ago by changes in individual market prices, which are independent of general market movements ( residual risk ).

When bonds are called specific interest rate risk that part of the interest rate risk, which stems from a single issuer or the individual issue. A key driver of the specific interest rate risk is the credit quality of the issuer. Thus, the specific interest rate risk of a bond whose credit risk in the form of a market price risk. In addition to bonds and credit derivatives make the creditworthiness of borrowers tradable. The credit risks so made ​​to tradable market price risks are often referred to as credit risks.

A special case is the term of the option price risk, which covers all of the resulting trade options with risks. Besides the risk of price change of the underlying ( eg the case of a stock option, a special form of equity risk is ) are options in particular the potential impact of volatility (volatility risk).

Market risk in the portfolio theory

According to the portfolio theory, it is usually possible to eliminate a portion of the price risk through diversification. This is commonly known as unsystematic risk. However, the systematic risk of securities carry all together and it can not therefore be reduced through diversification on. An investor who wants to invest in price- risk assets, this risk must assume so. The Capital Asset Pricing Model (CAPM ) knows a market risk, the arbitrage pricing model knows in principle more general risk factors.

An investor can only get out of the market risk by investing his money in a non- risky securities. These are essentially bonds with short term and time deposits. As the market risk can not be diversified required risk premium from investors for this.

Market risk and regulation in banking

In the original Basel Capital Accord of 1988 was only a hedge credit risks was provided by equity capital for banks. An additional market risks was not added until 1996.

Basis of capital adequacy are market risk positions

Market risk position

A market risk position is the sum of:

  • Trading book risk positions
  • Overall currency position
  • Commodities position

The overall currency position and the commodities position are independent of whether they belong to the proprietary trading, to be backed by own funds.

Interest rate risk and equity price risk are, however, inferior to its own funds if they are related to trading book and it is trading book institutions. The hedging of interest rate risk in the banking book is considered under the second pillar of Basel II.

Financial instruments comprise:

  • Securities
  • Money market instruments
  • Currency
  • Derivatives.

Trading book risk positions

In the trading book risk positions in accordance with § 1a KWG is all financial instruments, including hedging transactions related thereto and guarantees, which are subject to interest rate and date-related risks as far as the trade attributable.

Net positions

Net positions form the basis of capital adequacy for market risks. The determination is made by standard procedures or its own risk model. Market price risk is dependent on the extent of price fluctuation and the amount of the open position ( net position ). The product of the net position held and the maximum possible price fluctuations gives a measure of the maximum possible loss.

A closed position is secured, if the term ( maturity ) is the asset and liability position identical.

The measurement is based on the asset and liability balance sheet items, which open positions can be identified. The carrying amount of assets and liabilities gives information about the amount of future payments; difficult is it for property and equipment. Derivatives are not recognized in the balance sheet, but still must be included in the net positions. Option contracts are recognized in the Solvency means of the delta factor.

Capital requirements for market risk

Banks' internal risk models

Banks' internal risk models are used to measure market risk positions.

  • Financial risk