Treasury Markets and Operations

CHAPTER 7 Market Risk and Other Risk Measures

  Learning  objectives  

After studying this chapter, you should be able to:

1. Explain the concepts of country risk, counter-party risk, market risk, and settlement credit risk.
2. Understand how mark-to-market, value-at-risk (VaR), and basis point value can be used to calculate market risk.
3. Discuss how an AI can best manage financial risks.

Introduction

For banks and other financial institutions, risk is an inherent potential, while conducting business, often resulting from losses or fluctuations in future income that are triggered by events or ongoing trends. Assessing and managing market risk is an important function of the treasury. Since risks are myriad, this can be a complex undertaking and one that should not be taken lightly. However, it is important to remember that risk is not the same as loss. A risk factor may never turn into a risk event. Risk assessment should not be paralyzing but empowering. The aim of risk management is to accomplish goals in the most effective manner possible. If the goal is more certainty in revenues, lower risk exposures may be called for. If the goal is faster growth, an institution may decide to take on more risk.

This chapter examines various facets of market risk, starting with some discussion of the considerations of risk that the treasury should undertake and brief discussions of country risk and market risk. The HKMA defines market risk as the “risk to an AI’s financial condition resulting ...