What is a market risk?
Market risk is a common risk associated with the value of assets or investment. The value of the investment is subject to economic changes and market events. Therefore, significant positive or negative changes in the market can seriously affect the value of assets or investments of companies or individuals. An example of this is the large-scale bubble of the US in 2005-2008; Subprime mortgages written to individuals who are unable to repay loans have brought a high risk to creditors. This unsustainable bubble bursts and causes the main financial collapse in the banking and mortgage industries. For example, mortgages sold subprime during housing bubbles were again sold to banks and investment groups, which spread the risk of the economic market. Companies decided to invest in mortgages and secured debtabulka, despite the risk.
Diversification of assets of assets and investments can reduce the risk of some groups of investment. Companies can be able to reduce the impact of the risk of owing several different onessoil investment. Because the market risk varies depending on the type of asset or investment in the economic market, several different investments can create a lower probability of serious market risk. Traditional safe investments include gold or other commodities, government bonds, cash and cash markets. Investments in higher risks include corporate shares, trade bonds, derivatives or secured debt obligations.
Each asset or investment group responds to economic changes differently. Companies can use technical financial formulas or market analyzes to determine that investments offer the safest return under certain market conditions. Large companies often employ business and accountants to make these calculations and carefully monitor the total market risk of the company. Financial formulas such as a model of price of capital assets (CAPM) or weighted average cost of kaDrinkal (WACC) helps companies to determine how much market risk is safe than society begins to suffer from the negative effects of risk.
In the United States (USA), the US Securities and Stock Exchange Commission (SEC) requires publicly held companies to disclose publication published in their annual financial reports. Published information usually must include policies on accounting of derivatives and qualitative or quantitative information on the company to expose the company to the overall market risk. External stakeholders and investors can use these publication to determine the financial strength of companies and their stability on the economic market. Private companies are not subject to these rules; However, independent audits can describe in detail the market risk of exposurere for these companies.