Concept
-
Risk poses a universal threat to all market participants, which makes it necessary to manage. In approaching the field of risk management, it is useful to consider some additional characteristics that define financial markets. Owing to their competitiveness and focus on profit, participants in financial markets are always driven by a universal desire to protect their assets from loss. The ability of participants to mitigate potential losses is another important factor. To cover risk, they need to be able to pay for it.
Basic insights such as these have given rise to the development of many techniques that market participants relyon in order to manage risk. Below we explore four of these techniques. Each has a different approach, but all can clearly be observed when analyzing market participants and the financial instruments they use.