Explain the concept of Market Risk.

Explain the concept of Market Risk. 

Ans. The risks that prevail in a market for investment are called market risk. In other words, market risk is the risk of losses in positions arising from movements in market prices. Some risks are associated with it. 

1. Default Risk: If the debtor fails to make payment of loan, it is called default or credit risk. 

2. Inflation Risk: When there is fall in profits due to the fact that prices have gone up, it is called inflation risk. 

3. Repayment Risk: It arises in those borrowings in which the borrower has the option of paying before maturity.

4. Interest Rate Risk: It is fluctuation in the bond price that comes due to changes in interest rate overtime. Rise in interest rate reduces the market price of the bond and vice versa. It is measured as a percentage in value of bond to change in given interest rate. 

5. Liquidity Risk: Sometimes, lender might needs funds before maturity. In such a situation, there is no price guarantee as such. The risk of being forced to sell a security below its face value is called liquidity risk. 

6. Reinvestment Risk: The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased.