MARKET RISK

& ITS CASE

STUDIES
Introduction To Financial Risk Management
Ayesha Hameed
 Market risk refers to the potential for an
investor to experience losses due to

Market Risk
factors that affect the overall
performance of financial markets.

These risks are inherent to investing and

are largely unpredictable, as they stem
from changes in economic conditions,
political events, and market sentiment.
 Types Of Market Risk
Each type of risk arises from different factors and can impact a portfolio's performance in unique ways:

EQUITY RISK.
Equity risk is the risk of loss due to fluctuations in stock prices. It arises from factors
such as changes in a company's financial performance, industry trends, and broader
economic conditions.

INTEREST RATE RISK

Interest rate risk is the potential for loss due to changes in interest rates, which can
impact the value of fixed-income investments such as bonds.
 Types Of Market Risk
Each type of risk arises from different factors and can impact a portfolio's performance in unique ways:

CURRENCY RISK.

Currency risk, also known as exchange rate risk, refers to the potential for loss due to
fluctuations in foreign currency exchange rates.

COMMODITY RISK.

Commodity risk is the risk of loss due to fluctuations in the prices of commodities such
as oil, gold, and agricultural products.
 Factors Affecting Market Risk
Factors Affecting Equity Risk
Factors Affecting Interest Rate Risk • Changes in interest rates
• Monetary policy decisions by central banks • Inflation
• Inflation expectations • Political events
• Economic conditions • Changes in a company's management
• Financial performance
• Industry-specific events
03
04
Factors Affecting Currency Risk
• Changes in economic conditions
•
•
Political events
Central bank policies
01 02 Factors Affecting Commodity Risk
• Changes in supply and demand
• Market sentiment • Geopolitical events
• Country or region economic stability, • Macroeconomic conditions
fiscal policies, and geopolitical events. • Weather events
• Technological advancements
• Regulatory changes
Market Risk Management Strategies
DIVERSIFICATION

Portfolio diversification can be achieved through various

methods, such as investing in different asset classes (e.g.,
stocks, bonds, and commodities), sectors (e.g., technology,
healthcare, and finance), and geographic regions (e.g.,
domestic and international markets).

HEDGING

Some common hedging instruments include swaps, futures,

and options. These instruments can be used to hedge various
types of risks, such as equity, interest rate, currency, and
commodity risk, depending on the specific needs of the
investor or business.
Market Risk Management Strategies
ASSET ALLOCATION

Strategic asset allocation involves setting long-term target

allocations for different asset classes.
Tactical asset allocation, on the other hand, involves making
short-term adjustments to the strategic allocation.

RISK MONITORING AND REPORTING

Key risk indicators (KRIs) are metrics that provide insight into
the level of risk exposure in a portfolio or organization.
Examples of KRIs include Value at Risk, volatility, and credit
ratings.
 EQUITY RISK
Kodak (2012):
•Background: Eastman Kodak Company was a
multinational imaging and photography company.
•Crisis: Kodak filed for bankruptcy in 2012, citing
the challenges of adapting to digital photography
and declining sales of traditional film products.
The company's stock had experienced a
prolonged decline as it struggled to transition its
business model.
EQUITY RISK
Hertz Global Holdings (2020):
•Background: Hertz is a car rental company with
a global presence.
•Crisis: In 2020, Hertz filed for bankruptcy after
facing a sharp decline in demand for car rentals
due to the COVID-19 pandemic. The company's
stock price had already been under pressure, but
the pandemic worsened its financial challenges.
CASE STUDIES
 CURRENCY RISK
Nestle and Venezuelan Bolivar Devaluation (2015):
•Background: Nestle is a Swiss multinational food
and beverage company with a global presence.
•Crisis: In 2015, Nestle faced challenges due to the
devaluation of the Venezuelan Bolivar. The company
had significant operations in Venezuela, and the
country's economic turmoil and hyperinflation
negatively impacted Nestle's financial results. Nestle
had to write down the value of its assets in Venezuela,
leading to a substantial financial hit.
INTEREST RATE RISK
Ford Motor Company (2008):
•Background: Ford, like other automakers, relies on
access to affordable credit to finance its operations
and support consumer purchases.
•Crisis: During the 2008 financial crisis, interest
rates rose, credit markets tightened, and consumer
spending declined. These factors, coupled with a
downturn in the auto industry, led to a severe
financial crisis for Ford. The company faced liquidity
issues and had to mortgage its assets to secure
funding.
CASE STUDIES
 COMMODITY RISK

Glencore and the Commodity Price Slump (2015-16):

•Background: Glencore is a multinational commodity trading and mining company.

•Crisis: In 2015-2016, a crash in commodity prices, particularly in metals and minerals, put significant
pressure on Glencore's balance sheet. The company had substantial debt from acquisitions, and the sharp
decline in commodity prices led to concerns about its ability to service that debt. To address the situation,
Glencore announced a debt reduction plan, including asset sales and a capital raise. The company's stock
price experienced significant volatility during this period.

CASE STUDIES
 KEY NOTES TO REMEMBER
 Effective market risk management can maintain financial
stability.

 Identify, measure, and mitigate market risk to navigate.

 Market risk is constantly evolving.

 Continuously adapt risk management strategies.

THANK YOU