To manage market risk, businesses must first measure it. Common methods for measuring market risk include:
Value at Risk (VaR): VaR is a statistical technique used to measure the potential loss in value of a portfolio over a defined period and confidence level. It helps in understanding the maximum expected loss. Stress Testing: This involves simulating extreme market conditions to assess the impact on the business. Stress tests help identify vulnerabilities and prepare for adverse scenarios. Scenario Analysis: This method involves evaluating the impact of different hypothetical scenarios on the business. It helps in understanding how various factors can influence market risk.