Meeting 6 Overview
Price risk is the risk that the value of a security or investment or asset will decrease. Price risk hinges on a number of factors, including earnings volatility, poor management, industry risk, and price changes. A poor business model that isn't sustainable, a misrepresentation of financial statements, inherent risks in the cycle of an industry, or reputation risk due to low confidence in business management are all areas that will affect the value of a security. Certain commodity industries, such as the oil, gold, and silver markets, have higher volatility and higher price risk as well. The raw materials of these industries are susceptible to price fluctuations due to a variety of global factors, such as politics and war. Commodities also see a lot of price risk as they trade on the futures market that offers high levels of leverage. Unlike other types of risk, price risk can be reduced. Diversification is the most common and effective tool to mitigate price risk. Financial tools, such as options, futures, and short selling, can also be used to hedge price risk.