Market Risk – this type of risk to a company is written about almost daily with...

Market Risk – this type of risk to a company is written about almost daily with the fluctuations of the financial markets. These changes in market conditions can affect a company both positively and negatively. Provide one real example of a company being affected by this daily risk using a company and discussing this risk. There is usually a lot to discuss with this topic.

Expert Solution

Market risk is the risk that the value of an investment will decrease due to changes in market factors.
Market risk, also called "systematic risk" cannot be eliminated through diversification, though it can be hedged against in other ways.
Sources of market risk include political instability, economic conditions, changes in interest rates, natural disasters etc.
Systematic or market risk tend to influence the entire market at the same time.
Market (systematic) risk and specific risk (unsystematic) make up the two major categories of investment risk. The most common types of market risk include interest rate risk, equity risk, currency risk and commodity risk.
Detailed explanation of standard market risk factors is given below:

Equity risk: The risk that share prices will change.
Commodity risk: The likelihood that a commodity price, such as that of a metal or grain, will change.
Currency risk: The probability that foreign exchange rates will change.
Interest rate risk: The risk that interest rates will go up or down.
Inflation risk: The risk that overall rises in the prices of goods and services will undermine the value of money, and probably adversely impact the value of investment.

Risk can be reduced to some extent if you diversify your investments, i.e. widen your portfolio. However it is impossible to eliminate all risks. Some market risks are not possible to prevent or foresee.

Example: Recently with global steel prices nosediving while production costs rise, Tata steel, one of the largest steel maker, reported a profit of ₹702 crore in the June 2019 quarter, falling 63% year on year. The company had reported consolidated net profit if ₹1934 in the year ago period. Due to which the company share prices haves fallen.

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