Price risk is the risk that the value of an investment that you own will fall.
This risk illustrates how risks interact, as price risk could be caused by some or all of:
- Interest rate risk – interest rate fluctuations affect the value of instruments which pay fixed interest.
- Credit risk – the asset is worth less because the issuer’s credit standing has weakened.
- Market liquidity risk – the market is only willing to buy the asset at a lower price (if at all).
Price risk shows how risks can be bundled up into a single term in some applications, and how important it is that the treasurer understands how risks originate.
Although a single term can be useful when considering an asset or liability class, it can also confuse.
The terminology tends to be driven by symptoms rather than causes, and a risk management strategy should really be driven by the causes.