Final answer:
Measuring market risk is critical for a financial institution manager to value the bank's assets accurately, anticipate loan defaults, and devise strategies for safety and profitability. Risk assessment affects pricing in the secondary loan market, and interest rate comparisons are also essential. Effective risk management ensures the institution's stability and success.
Step-by-step explanation:
The measurement of market risk is paramount for the manager of a financial institution because it impacts the valuation of the bank's assets, primarily its loans. These valuations are contingent upon assessing the risk of loan defaults, which can be unpredictable. When a bank provides loans to customers, there is an inherent risk involved regarding whether the customers will repay these loans. Furthermore, this complexity escalates when dealing with international loans or intricate financial instruments, factors that a bank manager needs to consider for accurate asset valuation and risk management.
For financial institutions that consider purchasing loans in the secondary loan market, the perceived riskiness of the loan is a critical factor. It directly influences the price they are willing to pay for the loan based on borrower characteristics and the prevailing economic conditions. Moreover, the relative interest rates at the time of the loan’s origin and current interest rates are also vital considerations that could affect the loan's secondary market value.
Therefore, rigorous risk assessment and measurement enables a manager to make well-informed decisions, anticipate potential defaults, and prepare the bank's strategies accordingly to ensure the institution remains safe, secure, and profitable.