An Introduction to Value-At-Risk, Fourth Edition

CASE STUDY AND EXERCISES

CASE STUDY – MARKET RISK PROFILE

The following describes the market risk profile, value-at-risk (VaR) limits and product profile in place for the investment banking arm of a UK bank in the 1990s. The firm engages in trading worldwide in a wide range of products, and its use of VaR as a risk measurement tool is part of a comprehensive risk management framework. The data are sourced from the bank itself and are reproduced with permission.

VaR allocations

The following table shows the VaR limit allocation across the trading arm's product range.

VaR utilisation

Jump risk limits

Role of the market risk function

The bank has an independent risk management function, called ‘group market risk', that reports to the group head of trading risk (a group board member). The department's primary role is to:

• determine appropriate risk limit structures and methodologies;
• monitor limit utilisations;
• escalate trading limit breaches to head of group risk or the busi ness chief executive;
• regularly report risk positions;
• take responsibility for VaR model validation;
• undertake ...