What type of risk is described as the potential for loss due to adverse market movements?

Market risk refers specifically to the potential for financial loss resulting from fluctuations in market prices. This type of risk is associated with the overall movement of prices in the market, affecting the value of investments and portfolios. Factors influencing market risk include changes in interest rates, commodity prices, foreign exchange rates, and stock prices. Because market dynamics can lead to significant losses or gains, understanding market risk is crucial for investors and businesses alike.

In this context, credit risk relates to the possibility that a borrower will default on a loan or obligation, liquidity risk pertains to the difficulties in selling an asset without incurring significant losses, and operational risk involves losses stemming from failures in internal processes or systems. Each of these risks addresses different aspects of financial risk management, but market risk directly captures the essence of losses associated with adverse movements in market conditions.