PRE-TRADE RISK ANALYTICS
Figure 1: Dollar Exposure, Implied Risk Views & Marginal VaR, (Risk Contribution) Implied Risk Views
Dollar Exposure (US$ millions) Long/Short Price Risk
NYMEX WTI ICE Brent
NYMEX Natural Gas AECO Natural Gas HSC Natural Gas SoCal Natural Gas NYMEX RBOB NYMEX Heating Oil
$(6.00) $(4.00) $(2.00) $- Source: NQuantX
risk view of 10% means that for every dollar that we reduce our exposure to NYMEX Natural Gas, our portfolio VaR would decrease approximately by 10%. In Figure 1, we can also see that the HSC and Socal
Natural Gas positions are short from a dollar exposure perspective but the implied risk views are positive. The intuitive interpretation in this particular example requires analysing the overall portfolio structure. The long Natural Gas Henry Hub and AECO positions are
... the drivers behind the implied risk views are the relationships between each trading positions and the overall portfolio
still having a dominant effect in the overall book. Therefore, the HSC and SoCal exposures are in fact hedging the overall risk of the book. If the trader were to increase the short exposures to either HSC or SoCal, the risk of the book would be reduced. In contrast to the individual volumetric exposures, the key point to remember is that the drivers behind
the implied risk views are the relationships between each trading positions and the overall portfolio.
Risk Reduction Targets Another application of the implied risk view report
is to show the change in dollar exposure to a given market that would be needed to achieve a defined portfolio VaR reduction. Let’s assume that the current VaR of the book is $684,514, which is close to the $750,000 limit. The trading manager could determine the exposure change in each market required to change the portfolio VaR by a particular amount. Table 1 shows a exposure change report that would reduce VaR by $10,000.
Marginal VaR Contribution The final chart on the right of Figure 1 shows a
Table 1: Exposure Changes to Reduce VaR by $10,000 Risk Factor NYMEX WTI ICE Brent
NYMEX Natural Gas AECO Natural Gas HSC Natural Gas SoCal Natural Gas NYMEX RBOB
NYMEX Heating Oil Source: NQuantX 52 March 2013
Dollar Exposure change $ (1,007,620) $ 270,643 $ (104,496) $ (430,671) $ (492,271) $ (1,279,107) $ (198,201) $ (208,670)
marginal VaR report with the diversified percentage additive contribution to portfolio VaR. In our case, the largest contribution to portfolio VaR comes from the NYMEX Natural Gas net exposures (62%) followed by NYMEX Heating Oil (38%). The ICE Brent, as well as the HSC and Socal Gas Natural Gas positions are acting as natural portfolio hedges as their contribution to diversified VaR is negative. Similar reports could be generated
showing the contribution to risk by any other dimension of interest. [See Blanco (2012) for sample marginal VaR reports].
Use of Trade Risk Profiles & Best Hedge Reports in a Trading Floor Two commonly used pre-trade risk
analytical tools in financial institutions are trade risk profiles (TRPs) and best hedge
$2.00 $4.00 $6.00 -0.05 - 0.05 0.10 0.15 -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% Long/Short Risk (delta)
Marginal VaR (% approx.)
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