What is the connection between market and credit risk?

The connection between the market and the credit risk depends on the definitions of conditions that are not firm. The market risk concerns potential factors that may affect the total value of the investment portfolio. They are usually divided into commodity, currency, equity and interest. Credit risk can be defined either as any risks facing an investor that includes a loan or just a specific risk of a debtor's failure. Depending on the definition of credit risk, it is possible for market and credit risk to be counterparts or to the market risk to be an element of credit risk.

There are four main components at a market risk. The currency risk is that the exchange courses will change so that it is unfavorable to the investor. The commodity risk is that commodity prices will change in a way that is unfavorable to the investor. In both cases, there is also a risk that price volatility will increase. This causes investments such as contracts options, more unforeseening, which in turn makes them less attractive to investors, and PROto can reduce their market value. The final risk, interest risk, is that the predominant interest rates change. This may negatively affect the investor; For example, if rates increase overall, a fixed -rate bond is less attractive to investors, which can reduce its value for additional sales.

credit risk is less clearly defined and therefore the relationship between market and credit risk can be questioned. One of the definitions is that the credit risk is all the risks that include a debtor who cannot make agreed installments. With some types of investment, this has an immediate impact on the investor. For example, if the corporation fails on a bond, the bond holder does not get the money he expects. With others it is a knock-on effect; For example, if a mortgage holder whose policy has been sold as part of the default debt obligation, the market value of this CDO is reduced.

with this definitionThe credit risk, market and credit risk are two separate sets of risks to which investors face. They will interact to some extent because growing levels of starting values ​​will have an effect on all financial markets. However, these two risks are not indivisible. The investor of the shares will face the market risk, but may not have direct exposure to the credit risk.

In the alternative definition, credit risk concerns all forms of risks faced by investors. The market risk becomes one element of credit risk using this terminology. Under these circumstances, the risks of repayments are usually referred to as the default risks that are classified as another element of a broader credit risk.