What is the average daily VaR of a trader? Senior, junior, etc...?
If a trader has 20mm capital and let's say he is down -3K and he holds on to the position having the conviction that it will eventually go his way and it went down to 5K and hes keep averaging his position, do they care?

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Financial Modeling


As always, the answer is "it depends"...


typically, you start from capital, give expected annual return, expected vol of strategy, to determine baseline for acceptable drawdowns (intraday, daily, montly, yearly)

so, with 20mm of capital, a typical profit target/expectation is 20%, or 4mm/year
4mm/year = avg daily gain of 16k (if you make 16k every day, you'll make 4mm for the year)
This is simple math, no compounding or increasing of risk as your P&L cushion increases.

So, just with this, and in the risk 1 to make 2 theory, an acceptable intraday drawdown of 8k/day makes perfect sense (assuming the strategy has the numbers to fit the risk 1 to make 2 vol profile).


Thanks for your feedback. I know every funds vary, as far as risk limits given to the trader but is this your assumption or is this how funds typically measure their traders risk?


there is no "typical" but this is a baseline to use given the numbers you started with. Since every firm is different, there is no "cookie cutter" way to do it...however, this method will get you 80% there with most funds.

These are the numbers/methods that i've seen from real funds and banks.


really depends on what you trade as well. Trading equities is much different than say commodities like power. In power spot prices can go from $40/MWh to $999/MWh the next hour and then back down to $38/MWh. VaR is generally much higher in power. That being said Ive know Traders who have had the right consensus but have been stopped out due to short term volatility

it depends


The Value-at-risk is calculated firm-wide. Portfolio-wise ** ** ** .

For example a midstream estimates the the worst they can lose in the next ten days is 5 millions with a confidence interval of 95%.

In Commodities,
It's a function of volume, volatility and correlation and a confidence level % based on the probabilities of distribution.

Yes they do care, and should not care about your 'expectations' when they have a firewall between Sales Trading and risk management 'geeks'.

In your example,
AVERAGING down would increase, not lowering the VaR.

The last part of the answer to your question is strictly a** function** of where you work.

Category 1:
A utility(NRG), Wholesalers(Direct Energy) Midstreamer or Refiner, typically are Hedgers with limited trading.

They usually give to people nice ** trading title to make them feel important ... but the general rule is that these people can't, won't be able, aren't allowed to take 'considerable' inventory and price risk even if sometime they are absolutely right.
Category 2:**
Banks are regulated nowhere other industry. In Commodities have bigger VaR than category one, they take the other side of category 1 'the hedgers' (but it's in function of the enormous balance sheet as a % of equity).

Category 3:

The Trade Houses (Trafigura, GLENCORE), and Hedge-Funds are total different animals and their culture (not bound by the limitations and regulations in Category 1 & 2) allows them taking and giving considerable **** risk-units. They also give you a rope. Typically, will poach someone in the category 1 with well-known strategies and give more room than needed once in the hot spot.

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