Financial Market Risks - Barclays

Financial Market Risks Risk is generally perceived as exposure to danger or potential losses. In financial markets, however, a risk, i.e. the possibility of suffering financial losses, is usually also associated with an opportunity for gain. In other words, investing in an asset with a risk carries a possibility of financial losses, and the higher the asset’s risk, the higher the potential losses, but also the possibility of substantial financial gains. Financial Risks Financial risk can arise from several factors and there are different types which may or may not be concurrent. The different types of risk and the likelihood that they will occur are incorporated in the price at which assets are traded on financial markets and so they

are all directly or indirectly linked to the market risk. Possibilities of a higher return should be associated with higher degrees of risk. This is the case of stocks, which carry a greater risk than bonds but also, on average, offer higher profits at medium to long term. In turn, as bonds carry a higher risk than deposits, investors in bonds can expect a higher return on their investment at medium to long term than investors in deposits, bearing possible decreases in value. The main financial assets nullndividual securities or financial products investing mainly in these securities, as in investment funds, for examplenullcan be grouped into classes of risknull Market Risk The possibility of a fall in value or price of assets traded on financial markets. This type of risk includes: • The Exchange Risk – the possibility of a fall in the value of assets denominated in a foreign currency due to variations in the exchange rate. • The nullterest Rate Risk – the possibility of a fall in the value of an asset due to variations in market interest rates. nulledit Risk The possibility of a debtor not paying the creditor the amount onullednullincluding interest. This type of risk includes: • The nullsolvency Risk – the possibility of a company in which we have invested ceasing to trade, declaring insolvency and therefore not meeting its commitments. nullnullidity Risk The possibility of not being able to buy or sell a certain asset for lack of sellers or buyersnullor of suffering an excessive loss in relation to its real nullorth in a transaction on a market nullere there are fenullsellers or buyers. nullocks nullrisk nullrisk nullnds nullposits Financial Market Risks nullolatility nuller time, the prices at which financial assets are traded may nullctuate on the market, depending on the different types and classes of risk. These rises or falls in price constitute what we call volatility. nullen nullctuations are particularly accentuated in certain market situations, and especially when there is a considerable rise in prices followed by a considerable drop nullr vice versanull financial markets are said to be highly volatile. In other words, volatility is the result of deviations from an average price of assets or indexes and statistically corresponds to the standard deviation. nullolatility affects return on investments. nullwever, even investments in highernullisk assets, which are more volatile, tend in the long run to converge on the average...

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