Market Risk Limits

As mentioned above, risk limits are set for every trading book in a bank. These are generally market risk limits and are often determined by a specific market risk team within risk management. Depending on the type of trading book and the comfort level the bank has with the risk assessment, the risk limits can be simple or complex. Simple risk limits are just VaR (value at risk) based.

For example, the treasury trading book has a VaR of $2 million. As long as the traders don’t exceed that VaR they can do whatever client trades make sense to them on that trading book. This gives the traders the ultimate freedom to make trading decisions. This does not mean that a trader can use the maximum VaR on a consistent basis. If he did ...

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