Trading Jobs Trading Risk Management 1 — Questions and Answers
Question 1: What does 'Value at Risk' (VaR) measure?
- The average daily loss in a portfolio
- The maximum expected loss over a given time period at a specified confidence level (Correct answer)
- The total capital at risk in a trade
- The difference between market and book value
Correct answer: The maximum expected loss over a given time period at a specified confidence level
VaR estimates the maximum expected loss over a specific time horizon (e.g., one day) at a given confidence level (e.g., 95%), summarizing portfolio market risk.
Question 2: What is 'position sizing' in trading risk management?
- The total number of open positions in a portfolio
- Determining the appropriate amount of capital to allocate per trade (Correct answer)
- The maximum position size allowed by regulations
- The ratio of long to short positions
Correct answer: Determining the appropriate amount of capital to allocate per trade
Position sizing involves determining how much capital to risk on any single trade, typically expressed as a percentage of total portfolio value.
Question 3: What is a 'stop-loss order' used for in trading?
- Locking in profits at a target price
- Automatically closing a losing position at a predetermined price (Correct answer)
- Preventing a position from growing too large
- Stopping trading when daily loss limits are reached
Correct answer: Automatically closing a losing position at a predetermined price
A stop-loss order automatically exits a trade when the price reaches a specified level, limiting the maximum loss on any single position.
Question 4: What is 'leverage' in trading and why does it increase risk?
- Trading with borrowed capital, which amplifies both gains and losses (Correct answer)
- The use of derivatives instead of direct positions
- Trading across multiple asset classes simultaneously
- Using algorithmic systems instead of manual trading
Correct answer: Trading with borrowed capital, which amplifies both gains and losses
Leverage allows traders to control larger positions than their capital would otherwise allow, but losses are also magnified proportionally to the leverage ratio.
Question 5: What is 'mark-to-market' (MTM) accounting in trading?
- Revaluing positions at historical cost
- Revaluing positions at current market prices daily (Correct answer)
- Calculating the book value of a trading firm
- Recording trades only when they are settled
Correct answer: Revaluing positions at current market prices daily
Mark-to-market accounting requires positions to be valued at current market prices at the end of each trading day, reflecting real-time profit and loss.
Question 6: What is 'counterparty risk' in financial trading?
- The risk that market prices move against a position
- The risk that the other party in a trade defaults on their obligations (Correct answer)
- The risk of trading the wrong security by mistake
- The risk of technology failures during trading
Correct answer: The risk that the other party in a trade defaults on their obligations
Counterparty risk is the risk that the other party in a financial transaction will fail to fulfill their contractual obligations.
Trading Jobs Trading Risk Management 1
What does 'Value at Risk' (VaR) measure?