| Definition |
The risk of losses due to fluctuations in market prices, such as stocks, bonds, commodities, or currencies. |
The risk that a borrower or counterparty will fail to meet their financial obligations. |
| Cause |
Changes in market variables like interest rates, equity prices, exchange rates, and commodity prices. |
Borrower’s inability or unwillingness to repay loans or meet contractual terms. |
| Impact |
Can lead to volatile portfolio values and potential losses. |
Can result in default, financial loss, and impaired creditworthiness. |
| Measurement |
Measured by Value at Risk (VaR), beta, volatility, and sensitivity analyses. |
Measured by credit ratings, probability of default, and loss given default metrics. |
| Management Strategies |
Diversification, hedging with derivatives, stop-loss orders. |
Credit analysis, collateral, covenants, credit insurance, and diversification. |
| Examples |
Stock market crashes, interest rate hikes, currency depreciation. |
Loan defaults, bond issuer bankruptcy, counterparty failure. |
| Nature |
Systematic risk affecting entire markets or sectors. |
Usually specific risk related to individual borrowers or entities. |
| Regulatory Focus |
Monitored by market risk frameworks under Basel Accords. |
Credit risk management required under banking regulations and Basel Accords. |
Market Risk vs Credit Risk