# Risk budgeting

p.55, CFAI 5. Exactly the 8th line of 3rd paragraph (latest errata). Why is the VAR of the larger FX department 2 x \$5m =\$10m? I thought it should be \$5m x 3 = \$15m

it just shows there is 1 corr, the VAR is higher than BUs with low corr (the previous exam 70% of the 10\$mil) - don’t really see too much meaning out of hte samples…

ryanunsw Wrote: ------------------------------------------------------- > it just shows there is 1 corr, the VAR is higher > than BUs with low corr (the previous exam 70% of > the 10\$mil) - don’t really see too much meaning > out of hte samples… Sorry, I don’t understand. Are we talking about the same line? “Under these circumstances … management might consider closing down the fixed-income desk to generate … \$60m of returns on the 2 x \$5m =\$10m of VAR.” FX dept used to generate \$5m VAR on \$100m capital. With \$200m shifted over from the closed-down FI unit, FX dept should have 2 x \$5m = \$10m of VAR EXTRA. That should mean a total VAR of \$5m + \$10m = \$15m, for the larger FX dept. Did I miss anything?

I’m confused too but I’m with sticky, could not see why it’s “2”. It seems to me they are making the assumption that the FX dept can earn 0.2 of the capital whatever the VaR budget is, but then one can set it to whatever crazy number and we don’t bother computing it. And so is the example for closing the bond trading desk.

my understanding is the total risk budgeting of \$10mil of VAR is unchanged… (agree it’s unreasonable that the VAR doesn’t change when allocating 200mil from FI to FX)

ryanunsw Wrote: ------------------------------------------------------- > my understanding is the total risk budgeting of > \$10mil of VAR is unchanged… (agree it’s > unreasonable that the VAR doesn’t change when > allocating 200mil from FI to FX) huh? FX dept used to have \$5m VAR for \$100m cap. Now you add \$200m more to FX dept and you expect \$5m more with VAR? It’s not only a good deal. It’s magic!

agree, man! before your post, I’ve already marked this example as “for demo only” hehe

just wanna see if there are other thoughts on this?