As a fresh risk manager, today I got an assignment to check whether our risk measurements / limits are setup properly (whether the limits are so tight that affect our p&l) . Better if I can project the values of those measurements to our p&l value. We are mainly interested in three kinds of measurements: the values of VaR, of stress test, and value of exposure. We basically have fixed income products, equities, bond, index and commodity futures, as well as some equity derivatives such as vanilla and exotic options (we are a sell-side firm). So I was wondering if someone can name some articles or share some insight of common practice. Thank you very much!
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2 Answers
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I would check performance return from each sectors and test if it will improve with different risk limit while total risk still tolerable.
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Seems like a complicated issue perhaps not well suited for general discussion (too specific to the situation).
What I would do is
(0) Understand in detail what the limits are currently (may be trivial or may involve a lot of questioning and writing things up on your part)
(1) Check which product desks are frequently at or near their upper limits
(2) Check the profitability of such products
(3) Inquire with profitable near-the limit desks whether they could use a bigger limit, keeping in mind however that traders almost always feel that they could be much more successful if they had bigger limits :)
In any case it is an excellent project for you to learn more about the internal functioning of your organization and meet people with different jobs and points of view. But the advice outsiders can give you is limited.
