Everything you do in life has a risk. From riding your bike to learning how to cook no matter where you go you run risks. However, the risks are manageable. Case in point, if you avoid risks all the time then you will never achieve anything great. But at the same time, too many risks and you could end up broken and hurt. The same premise applies to market risks.
As we know, the trading market is a great place to earn some money. Not only that but it can also increase your network by trading with people all around the world. However, how can you minimize the risks associated with this business? After all, this is concerning money so you shouldn’t just throw it all away without proper management. So this list is made to help you find the important market risks to watch out for.
Interest Rate Risks
Change is inevitable. That is something all of us must learn to accept. Although, that does not mean it will always be for good. Sometimes change can bring about bad unexpected effects that can diminish our chances. And the same could be said with interest rate risks.
There are securities out on the market that is being sold at a fixed price. More often than not they are not worth their current market value because they are usually too expensive. However, interest rates could cause them to become too cheap or too expensive as the years go by. And since they are fixed, you cannot just sell them at a higher value whenever you want. To put it simply, it is the risk of a sudden change in interest rate. You can avoid such a scenario from happening by purchasing bonds that have different maturity rates to prevent from a singular sudden downfall. Because rate management takes time to mature, you can wait to bide your time for the right moment to sell.
Volatility and Hedging Market Risk
There would not be a market if there is nothing to sell. That is the simple fact about trading. Although, managing price to your supply and demand is a challenge of its own.
Volatility is the change in the prices of commodities, currencies, and stocks. Volatility is calculated annually. And as such an absolute number can occur at an initial value.
There are numerous hedging strategies that investors use to protect themselves from volatility market risks.
How to Measure Market Risk
Risk management requires proper planning. Just like you won’t dive into a cave without the necessities, you would also need to measure your market risks. But how can you measure something like market risk?
Most investors and traders utilize what is knows as the value-at-risk (VaR) method. VaR modeling is a statistical risk management method that quantifies a stock or portfolio’s potential loss as well as the probability of that potential loss occurring