Managing Financial Market Risk - dummies

By Aaron Brown

Part of Financial Risk Management For Dummies Cheat Sheet

When managing financial risk, market risk – the uncertainty about how prices will change in the market – is a constant concern. And a valid one. You should always weigh the risks before making any market decisions.

Prices may move to levels that cause you to lose control of your securities if investors redeem more than you can easily pay out. Alternatively, lenders may demand more cash than you can raise. Dangers can come from several directions.

Volatility, the normal ups and downs of prices, is how you make money in finance, and the main market risk. Too low a level of volatility can mean that you don’t generate enough profits in good times to satisfy investors or survive bad times; too high a level can eat into returns and frighten investors and counterparties.

Sometimes market prices move to a level that allows you to initiate a position you could not do in normal markets. Be prepared to seize such opportunities.