Survey On Market Risk In Nigeria

Project and Seminar Material for Actuarial Science

Survey On Market Risk In Nigeria


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 lossin 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

  1. To survey the Nigerian market risk.
  2. To analyze the risk factor involved in venturing into the Nigerian market.
  3. To know the stability level of Nigerian markets.
  4. To know if the Nigerian market is safe for investors.
  5. 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

What is the stability level of Nigerian markets?

  1. Is the Nigerian market is safe for investors?
  2. Does the Nigerian market encourage SME development?
  3. 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

1. 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.

2. 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.

3. Volatile:

Volatility frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon.

4. Investment:

The action or process of investing money for profit.


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