What is meant by market risk?

Market risk refers to the potential for losses due to changes in market prices, which can affect a firm's investments. This encompasses fluctuations in stock prices, interest rates, exchange rates, and commodity prices. Investors and firms are exposed to this type of risk because external factors, such as economic conditions, geopolitical events, and changes in market sentiment, can significantly impact asset values.

Understanding that market risk specifically deals with movements in financial markets is crucial. It does not address operational risks, such as the risk of losing cash flow from operations, which is more related to a company's internal management and operational efficiency. Similarly, while international investments do carry specific risks like currency or political risk, these are broader concerns that may fall under different categories of risk, not solely market risk. Legal obligations and compliance are typically classified under regulatory or legal risk rather than market risk. Hence, the correct choice directly pertains to the impact of market dynamics on asset values.