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1. #Asset classes and financial instruments quiz how to#
2. #Asset classes and financial instruments quiz full#

The data used to estimate potential losses are generated from past prices and rates, not the ones to come. Although a portfolio’s exposures can be identified with some certainty, the potential losses that could arise from those exposures are unknown. Still, market risk is not an easy risk to capture. As a result, there is a large amount of data on market risk and a lot of collective experience dealing with this risk, making market risk one of the easier financial risks to analyze.

#Asset classes and financial instruments quiz how to#

It requires the application of judgment and experience not only to know how to use the models appropriately but also to appreciate the strengths and limitations of the models and to know when to supplement or substitute one model with another model or approach.įinancial markets operate more or less continuously, and new prices are constantly being generated. They also provide insight into the gains and losses the portfolio might reasonably be expected to experience and the frequency with which large losses might occur.Įffective risk management, though, is much more than just applying financial models. For example, investment risk models help a portfolio manager understand how much the value of the portfolio is likely to change given a change in a certain risk factor. In doing so, they provide critical information necessary to manage investment risk. Financial models attempt to capture the important elements that determine prices and sensitivities in financial markets. A model is a simplified representation of a real world phenomenon. The process of managing market risk relies heavily on the use of models. Risk management is the process of identifying and measuring risk and ensuring that the risks being taken are consistent with the desired risks. In essence, market risk is the risk arising from changes in the markets to which an organization has exposure. Market risk is distinguished from credit risk, which is the risk of loss from the failure of a counterparty to make a promised payment, and also from a number of other risks that organizations face, such as breakdowns in their operational procedures. Market risk is the risk that arises from movements in stock prices, interest rates, exchange rates, and commodity prices. This reading is an introduction to the process of measuring and managing market risk.

#Asset classes and financial instruments quiz full#

Measuring and Managing Market Risk Download the full reading (PDF)