This post is actually Chapter 2 (of 8) from our very well-received, 32-page E-Book –Benefiting from VaR – Quick Guidelines for Commodity Risk Practitioners. A quick recap for those who’ve read and enjoyed it, and for those who haven’t yet read it, you can download it now from here ! The E-Book is written for Commodity Risk Practitioners who are just starting with a Risk Function as well as those who have a ready set-up and are looking for better ways to leverage on that.
Chapter 2: Set Risk Limits
Today’s technology has made it easier to put real-time Preventive measures in place rather than just Corrective measures.
Setting Risk, Quantity and P&L limits are the most essential requirements for a robust Risk Function. Think of Limits as our eyes – they help define our position relative to everything else around us.
The more well-defined your limits are, the more process-oriented your portfolio management will be. Just as the open quantity limits are defined for traders, commodities, business units and sometimes even counterparties, the Risk limits too should be defined for each one of these, apart from the Total Portfolio.
For those who haven’t yet defined their Risk Limits:
The Question “Is our Portfolio too Risky?” – has no meaning until you define Relative to What !”
Besides, it is also possible today to have automated alerts for all the limits that have been set by the organization. Automation helps in clear, concise pointers to whatever is potentially / already wrong with the portfolios. More serious limit breaches should be sent to business heads as well. With this, even before the Risk Team comes in for the day, their day’s tasks, are already set, by priority !
Stay tuned for more chapters from our E-Book over the coming weeks !
On a related note, RiskEdge Software allows users to set limits on any parameter including risks, exposure, P&L, quantity, for any commodity, business unit, or market allowing users across the organization to monitor different parts of the portfolio right from their mobiles. Just this feature completely changes the way Risk is managed in most companies today – from passive to active !