[DerivativeABC] What Are 'Risk-On' and 'Risk-Off'?

[Image source=Yonhap News]

[Asia Economy Reporter Ji-hwan Park] When reading newspapers or watching the news, you often come across the terms Risk On or Risk Off.

Usually, few people know exactly what these terms mean. Simply put, Risk On and Risk Off can serve as traffic signals for capital flows.

Risk On implies taking on risk. It means that when market anxiety subsides and expectations for economic recovery rise, a large amount of money moves into risky assets. It refers to funds being invested in assets with higher risk such as stocks, commodities (raw materials), and high-interest currencies. Generally, when market optimism strengthens, investors actively seek returns and adopt a Risk On strategy by investing in higher-risk assets.

Conversely, Risk Off refers to a risk-averse strategy. When market pessimism is high, investments are made to avoid risk. It is an investment strategy that moves funds into relatively safe assets such as government bonds, time deposits, gold, and the Japanese yen.

The current global market is likely to remain in a Risk Off state until the end of the year. This is because market volatility is expected to increase due to President Trump's refusal to concede after the US presidential election. Some even advise structuring portfolios with cash-equivalent assets, which are considered the safest assets.