What is Market Risk?
Market risk is the risk of financial loss arising from adverse movements in market prices, including foreign exchange rates, interest rates, equity prices, and commodity prices, affecting both trading positions and structural balance sheet exposures.
How It Works
- FX risk: losses from currency movements on foreign-currency assets and liabilities.
- Interest rate risk: losses from rate movements on fixed-income holdings or floating-rate exposures.
- Equity price risk: losses on equity portfolios from market drops.
- Commodity price risk: losses on commodity holdings or contracts.
Saudi Context
SAMA-regulated Saudi banks compute market risk capital under Basel III standards (standardized or internal models approach). Saudi corporates importing from non-USD jurisdictions face active FX risk because the SAR-USD peg shields them from USD exposure but not from EUR, JPY, or CNY moves. Hedging via SAMA-licensed bank forwards is the standard mitigation.
Example
A Saudi importer has SAR 30,000,000 in EUR-denominated payables. A 5% EUR appreciation against SAR creates a SAR 1,500,000 unrealized loss, mitigated by hedging 70% of the exposure via forward contracts with a Saudi bank.