Entrima
Training:
Value At Risk
Monitor your market risk; analyse the value at risk (VaR) position.
Note: risk develops opposite of your P&L; mind the inverse relationship (P&L vs. VaR).
This simulation mimics the fundamentals of the trading environment and market activity. Focus is only on relevant aspects so that you cannot be distracted by (currently) irrelevant aspects. The modular setup of this simulation allows therefore for gradually grasping one concept or process after another, making it very suitable for non-traders. Actually, it is suitable for all professionals with a role in (or relating to) the wholesale commodity or energy markets. It is very suitable for non-traders as terminology is covered on the go, thereby intuitively embedding concepts and processes.
Capacity
You act in the role of both a market participant and a risk manager.
Objective
The aim of this simulation is to learn how the value at risk number develops; explain yourself why it does so. Analyse how the VaR number develops if you enlarge your position (double or triple it); clarify the development. You could try to control your risk or to minimise your exposure by liquidating a position.
Task
Watch market risk to appear when you open a position in a term contract.
Scenario A:
First, take a position in one contract for a volume of only one. Then, double this position to two and thereafter to ten. Meanwhile check what happens to your VaR position (your exposure).
Scenario B:
First take a position in one contract and check your VaR position. Then, take an opposing position in the other contract for an equal volume (long product one versus short product two). Then, check your VaR position once more. It should have gone down drastically, due to the offset of risk. After all, the price correlation between the two products is positive and very significant (+0.95).
Conclusion
At the end of the simulation, analyse your performance. See what you have done and when you have done this and whether it could have been optimised. This way, you learn and optimise your competences.
Verify whether your P/L has gone hand-in-hand with the risk you have been exposed to.
Financials
The value at risk is not equal to the maximum loss, but is typically lower. It is calculated based on the price volatility level (being the annualised standard deviation, expressed in a percentage). For the calculation the actual market price is considered.