IF I have 200 million allocated to my Equity Desk and 100 million allocated to my fixed income desk. both have a maximum Acceptable VaR of 10 Million
do they have the same RISK BUDGET?
Good question. I am not 100% sure but I think yes in dollar terms but Fixed Income desk is more risky in % terms.
that was a question in on of the MOCK exam. The answer is no.
from the CFAi books :
o take an organizational perspective first, risk budgeting involves establishing objectives for individuals, groups, or divisions of an organization that take into account the allocation of an acceptable level of risk. As an example, the foreign exchange (FX) trading desk of a bank could be allocated capital of ˆ100 million and permitted a daily VAR of ˆ5 million. In other words, the desk is granted a budget, expressed in terms of allocated capital and an acceptable level of risk , expressed in euro amounts of VAR.
(Institute 243)
Institute, CFA. Level III 2013 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons P&T, 6/18/2012. .
I don’t get their explainations.
Risk budget is a measure based on allocated capital and potential loss. So its based on both the amount of money allocated to the desk and the maximum VaR allowed
Thanks!