How to spot a VaR cheat

Traders can use weaknesses in VaR measurement to make it appear that they are not taking any risks. Brett Humphreys exposes how easily this can be done

So you are a trader at an energy company. You have always earned bonuses based on the profits you generate for the company. Of course, you also took the risk that if you caused a loss you could be fired. But yesterday, management announced that the initiative proposed by the corporate risk manager had been accepted. Trading performance would no longer be measured simply by profits, but would now be risk-adjusted. While this is a major change, it does not necessarily have to threaten

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