This document discusses various types of market risk faced by banks, including interest rate risk, currency risk, equity risk, commodity risk, and inflation risk. It provides details on the strategies adopted by banks to hedge against each type of risk, such as using interest rate swaps to hedge interest rate risk and options to hedge equity risk. It also explains the impact of changes in different market variables like interest rates, currency exchange rates, stock prices, and commodity prices on banks' earnings and balance sheets.

1. MARKET RISK
Hafis 68
Prekshya Pandey 75
Nehali Savaratkar 49
Anjali Binjve 80
Preksha Soni 59
Riya Gupta 82

2. MARKET RISK
• The possibility of loss to a Bank caused by changes in market variables.
• Risk to the Bank’s earning and capital due to changes in the market level of interest rates or prices of securities,
Foreign Exchange, Commodities & Equities as well as volatilities in the prices.
Types Of Market Risk
1. Liquidity Risk
2. Interest Rate Risk
3. Currency Risk
4. Equity Price Risk
5. Commodity Price Risk
6. Concentration Risk
7. Reinvestment Risk
8. Horizon Risk
9. GeoPolitical Risk

3. INTEREST RATE RISK
• The interest rate can take different form:
• gap risk
• Basis risk
• Yield curve risk
• Strategies adopted by the Banks:
• Forward Rate Agreement
• Interest rate Swaps
• Financial Swaps
• Interest Rate Caps, Collars and floor
• Swap valuation

4. IMPACT OF CHANGE IN INTEREST RATE
• Increase/decrease of cost of borrowing
• Increase/decrease in mortgage interest payments
• Higher interest rates increase the value of a currency
• Increase/decrease in Government debt interest payments

5. EQUITY RISK
• What is Equity risk?
• STRATEGIES ADOPTED BY BANKS TO HEDGE EQUITY RISK:
• 1.MODERN PORTFOLIO THEORY:-.
• 2.OPTIONS:Options are another powerful tool .
• IMPACT OF EQUITY RISK:
• Variation in the market price
• Demand and supply

6. EQUITY RISK(CONT.)
• TOOLS FOR MEASURING EUITY RISK:
• 1.STANDARD DEVIATION:-
• 2.Beta:- Measures the amount of systematic risk .
• EQUITY RISK ASSOCIATED WITH BANKS:
• Equity as collateral for loans
• Change in stock price

7. CURRENCY RISK
• What is currency risk?
• Impact of currency risk
• Strategy to overcome currency risk

8. • What is commodity risk?
• Exposure of Banks to commodities
• What type of commodity business banks mostly lend to?
• Eg. Of default in collateral:
• Mitigating risks – NCDEX
COMMODITY RISK

9. INFLATION RISK
• What is inflation risk
• Strategies adopted by the banks to hedge the risk
• Impact on the banking sector
• Relationship between interest rate risk and inflation risk
• Example: Banks with high NPAs