Explain the various types of 'Market Risk' involved in banking business. Differentiate between 'Counter Party Risk' and 'Country Risk'.

Types of Market Risk involved in banking business are as under: Interest rate risk : Interest rate risk is the probability that variations in the interest rates will have a negative influence on the quality of a given financial instrument or portfolio, as well as on the institution's condition as a whole. The risk affects the Net Interest Margin (NIM). Currency risk : Currency risk is the risk where the fair value or future cash flows of a given financial instrument fluctuate as a result from changes in the currency exchange rates. Price risk : Price risk occurs when the fair value or future cash flows of capital and debt financial instruments (stocks, bonds, indexes and derivatives connected with them) fluctuate as a result from market prices' changes, no matter whether these changes are caused by factors typical for individual instruments or for their issuer (counterparty), or by factors related to all the instruments traded on the market. It arises if investment is sold prematurely. Default or Credit Risk : Credit risk is more simply defined as the potential of a bank borrower or counterparty to fail to meet its obligations in accordance with the agreed terms. For most banks, loans are the largest and most obvious source of credit risk. It is the most significant risk, more so in the Indian scenario where the NPA level of the banking system is significantly high. It is prevalent in case of loans. Operational Risk : It arises due to failed internal processes, people or system or from external events like, frauds, incompetency of staff, faulty documentation, non-compliance etc. Strategic Risk : This risk arises due to adverse business decisions, improper implementation of decisions. Counterparty Risk and Country Risk Counterparty Risk : This is a variant of Credit risk and is related to non-performance of the trading partners due to counterparty's refusal and or inability to perform. The counterparty risk is generally viewed as a transient financial risk associated with trading rather than standard credit risk. Country Risk : This is also a type of credit risk where non-performance of a borrower or counterparty arises due to constraints or restrictions imposed by a country. Here, the reason of non-performance is external factors on which the borrower or the counterparty has no control.