Market Risk – is the risk that the value of your portfolio decreases based on market factors such as interest rate, equity , fx and commodity etc. Detailed explanation provided here .
Value At Risk ( VAR ) – is a measurement of Market Risk . VAR can be at the firm level or at a portfolio level. VAR – is the probability that you may lose a set % of money over a given time period. You can read more about VAR here .
Sensitivity Analysis is another measurement of Market Risk. It is modifying independent factors that make up a dependent factor to evaluate the results of different scenarios.
Market Risk can have different usage depending on the context you are using it in. For a retail investor this is the risk in the value of his / her portfolio due to change in market factors. For a bank that does trading with other large organizations for the purpose of generating profit – the same definition applies . The bank however will use estimates of its market risk number for purposes such as deciding how much capital to hold to offset losses arising from market risk – reporting numbers to bank’s regulatory bodies etc.
This paper by McKinsey provides a great in-depth look at how banks currently calculate market risk. Most of this will be changing due to a new Market Risk regulation called FRTB – Fundamental Review of the Trading Book. It is still important to understand current state before making an attempt to understand FRTB.
I find this blog on Risk Management to be extremely helpful and relevant to Market Risk in Banking and FRTB. Great resource if you wanted to learn more.