Value at Risk and Bank Capital Management

Apparently, a bank can simply set a variable VaR limit for the trader equal to the

maximum potential loss the bank would accept for the entire year. In this way, the rela-

tionship between the maximum yearly potential loss and maximum daily VaR would be

simple and clear. Yet this solution should be rejected for two reasons. First, it might lead

to unacceptable exposure peaks (in one day the trader could put at risk the amount the

bank might accept losing in an entire year). Second, a variable VaR limit would force the

trader to stop trading in the extreme case when his cumulated losses reached his or her

total initial limit, and hence it would ...