CHAPTER ONE
INTRODUCTION
1.1. Background of the study
Market risk is the risk that the value
of an investment will decrease due to moves in market factors. It
can also be said to be the risk to
an institution resulting from movements in market prices, in particular, changes in
interest rates, foreign exchange rates, and equity and commodity prices. Market risk is often
propagated by other forms of financial risk such
as credit and market-liquidity risks. Market risk is the risk of loss in the
value of a financial institution's proprietary trading holdings in equity,
debt, FX or commodity instruments, due to fluctuations in market prices. Market
risk can also arise with the management of client's moneys where financial
institutions provide unhedged guaranteed minimum returns. A form of market risk
also arises where banks accept financial instruments exposed to market price
volatility as collateral for loans. Poor market risk management practices can
lead to significant losses very quickly in volatile market conditions and also
complete institutional collapse in severe situations. The most spectacular
recent case of market risk management failure was the bankruptcy of Bear
Sterns, a US investment bank with substantial proprietary trading activities,
at the start of the global financial crisis in 2008. During the 1998 emerging
market crisis, LTCM a large US hedge fund made massive losses on so called zero
risk arbitrage derivative contracts and the US Fed had to step in to prevent a
systemic disruption. However, the most famous case was probably the collapse of
Barings Bank, a 100-year-old British bank (and bankers to the royal family) in
1995 due to inadequate oversight of equity futures proprietary trading
activities in the Asian operations.
The
global financial crisis has shown that financial markets are becoming more
integrated, more complex and more volatile, than what was previously commonly
believed. The importance of market risk management will thus increase going
forward. The management of market risk is highly complex. To limit the size of
market risk exposures it should allow traders to take to achieve profit
targets, a bank needs to have an understanding of the size of potential loss
that can be incurred under extreme market volatility. As nobody has a crystal
ball, we can only rely on statistics to provide us with an estimate of downside
market volatility. Deriving variance/co-variance parameters from historical
market rates data, we can estimate for a given statistical confidence limit
what the maximum potential loss in a downside scenario could be.
1.2. Statement of the general problem
The
loss of finances as a result of the instability of the market has resulted to
the steady decline of our economic base and foreign reserve. This has equally
discouraged small and medium enterprises which is one of the cardinal thrust of
any economy. The lack of proper understanding of the market has influenced
unnecessary inflation and scarcity of goods.
1.3. Objectives of the study
The following aims and objectives of the study
Ø To
survey the Nigerian market risk.
Ø To
analyze the risk factor involved in venturing into the Nigerian market.
Ø To
know the stability level of Nigerian markets.
Ø To
know if the Nigerian market is safe for investors.
Ø To
know if the Nigerian market encourages SME development.
1.4. Significance of the study
This
study will be of importance to investors as this would help them in knowing the
true state of the Nigerian market. This study would also be of immense
importance to SME owners in understanding the level of risk factor involved in
Nigerian market.
1.5. Scope and limitation of the study
This
study is restricted to the survey on market risks in Nigeria.
Limitation of the study
Financial constraint- Insufficient fund tends to impede the efficiency of the
researcher in sourcing for the relevant materials, literature or information
and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will
simultaneously engage in this study with other academic work. This consequently
will cut down on the time devoted for the research work.
1.6. Research Questions
Ø What
is the stability level of Nigerian markets?
Ø Is
the Nigerian market safe for investors?
Ø Does
the Nigerian market encourage SME development?
Ø Is
the risk in venturing into the Nigerian market enormous?
1.7. Research Hypothesis
H0:
The risk factor of venturing into the Nigerian market is not enormous
H1:
The risk factor of venturing into the Nigerian market is enormous
1.8. Definition of terms
Ø MARKET RISK: The possibility
for an investor to experience losses due to factors that affect the overall
performance of the financial markets. Market risk, also called "systematic risk," cannot be eliminated through
diversification, though it can be hedged against. The risk that a major natural
disaster will cause a decline in the market as a whole is an example of market
risk. Other sources of market risk include recessions, political turmoil, changes in interest
rates and terrorist attacks.
Ø SME: Small and
medium-sized enterprises (SMEs) are non-subsidiary, independent firms
which employ less than a given number of employees. This number varies across
countries.
Ø VOLATILE: Volatility
frequently refers to the standard deviation of the change in value of a
financial instrument with a specific time horizon.
Ø INVESTMENT: The action or
process of investing money for profit.
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