Bap1 (Market Risk)

• Market risk - arises from the trading activities of banks and is a consequence of movements in

  market prices.
• General market risk or

  systematic risk - is the risk of an adverse movement in market prices that is applied across a range of

  assets.
• Specific risk - is the risk of an adverse movement in the price of an individual asset
• foreign exchange transactions - one currency is exchanged for another currency.
• Exchange rates - reflect the relative value of one currency in relation to another currency.
• Loans and bonds - are legally binding contracts through which the borrower borrows the principal

  amount specified in the bond or loan from an investor and in exchange pays a specified amount of interest, usually at regular intervals.
• Coupon rate or Nominal Rate - is usually referred as the interest rate

  referenced in the contract and this rate may be fixed or floating.
• Interbank Loans - These banks sell their excess funds to banks that need them to finance the loans they underwrite or investments they make.
• Equities - also called shares or stock, represent a stake in the ownership of a company.
• Commodities - are generally homogeneous products irrespective of the geographical or physical market where they are being sold.
• Derivatives - are financial instruments whose value changes in response to changes in the value of related underlying assets that can also be bought, sold,

  and traded.
• Forward Contract - is a nontransferable contract that defines the delivery of assets
• Futures contract - is a standardized and transferable contract that defines the delivery of assets.
• Options - convey certain rights to the buyer of an option.
• Call option - gives the buyer the right but not the obligation to buy a financial instrument from the seller of the option on or before a specific time for a specific price.
• Strike price - the price at which the option holder can buy or sell the underlying asset.
• Put option - gives the buyer the right, but not the obligation, to sell a financial instrument to the seller of the option at a specified time (expiration date) for a specified price.
• Swaps - allow two parties to exchange cash flows with each other at a future date.
• The bank must decide how much risk it is willing to assume to make a profit, usually referred to as a bank’s risk appetite.
• position - refers to the ownership status of a particular financial instrument.
• long position - bought, or owns, the financial instrument and will

  profit if the price of the instrument goes up or will incur a loss if the price of the instrument goes down.
• Short Position - it means that the investor owes those stocks to

  someone but does not actually own them yet.
• Speculation - Involves buying (long position), holding, selling, and short-selling (short position)

  financial instruments to generate profits.
• The difference between the buy price and sell price is called the bid-ask spread.
• exchange market - is a centralized marketplace where brokers and traders meet and, on behalf of

  their customers or on their own account, buy and sell standardized financial instruments such as equities, bonds, commodities, options, and futures.
• over-the-counter or OTC market - does not have a physical location for its marketplace.
• over-the-counter or OTC market - the buying and selling of financial instruments takes place directly between the two parties to the transaction
• General market risk - refers to adverse change in a market that affects market participants broadly.
• Specific risk - refers to change in conditions that affect only one submarket
• Foreign Exchange Rate Risk - The risk that the value of a foreign currency will change against the value of the domestic currency.
• Interest Rate Risk - The potential loss due to adverse changes in interest rates.
• Equity Risk - The potential loss due to an adverse change in the price of stocks
• Commodity Risk - The potential loss from an adverse change in commodity prices.
• Credit Price Risk - This risk type applies to cash instruments, such as loans and bonds, as well as to derivatives instruments, such as credit default swaps (CDs), in both single-name and index form.
• Value-at-risk (VaR) - To measure market risk in their portfolios
• Value-at-risk (VaR) - is defined as the predicted loss at a specific confidence level over a given period.
• Expected Shortfall - is the average loss that could occur more than the loss calculated by VaR over the same time and using the same confidence level.
• Stress testing - considers instances of value changes, such as a rapid change in interest rates or

  equity indices.
• Scenario analysis - evaluates portfolio performance in severe states of the world, either

  hypothetical or historical.
• Hedging - is the opposite of speculation.