market risk

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The risk inherent in dealing on a market where prices may change. The obvious market risks are buying on a market that subsequently falls and selling on a market that rises; these risks can be reduced by hedging (see hedge), especially by means of futures contracts or options, but they can never be eliminated. These forms of market risk are the obverse of the market opportunities that provide speculators with the chance of making a profit. Exchange-rate exposure may be an element of the market risk. For example, a buyer of US securities in London, paying in sterling, faces not only the risk that the price of the securities will fall in the USA, but also the risk that there will be an unfavourable change in the rate of exchange between dollars and pounds. See also systematic risk; value-at-risk.

Subjects: Financial Institutions and Services.

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