In this article, Carlos Blanco introduces a set of tools to assist traders and risk managers in actively managing the value-at-risk of energy derivatives portfolios Over the past 20 years, value-at-risk has been gradually gaining acceptance as a key market risk control tool for trading portfolios. VAR is used to set market risk limits at various levels of the portfolio hierarchy, as well as to determine risk-adjusted performance. From a risk control perspective, VAR is often treated as a binary variable. According to this line of thinking, as long as a trading book is below its VAR limit, then no action is required. However, once traders approach or exceed their VAR limit, they need access to the right tools to provide insight on the optimal actions that need to be taken to reduce the risk of their portfolios. Left to their own devices, traders may find themselves in the dark, as the risk reduction benefits of a given trade may not be straightforward given the complex interactions between portfolio constituents. Managing VAR actively requires a set of decision support tools that can help traders optimise the risk of those exposures. Some of the benefits of active VAR management tools include: the ability to identify key sources of risk and main contributors to portfolio risk; the ability to calculate implied risk views based on diversified portfolio positions; the ability to perform what-if analysis of potential risk reducing trades; and to find optimal hedge positions based on a set of VAR constraints. In this article, we introduce marginal risk reports and trade risk profiles. These tools can provide valuable intelligence regarding the key sources of portfolio risk, as well as the impact on portfolio VAR of various trading strategies. Click here to download the full version of this paper in PDF format...
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