Trading Jobs Trading Risk Management

Question 1

What does 'Value at Risk' (VaR) measure?

Accepted Answer

The maximum expected loss over a given time period at a specified confidence level

Answer

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?

Accepted Answer

Determining the appropriate amount of capital to allocate per trade

Answer

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?

Accepted Answer

Automatically closing a losing position at a predetermined price

Answer

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?

Accepted Answer

Trading with borrowed capital, which amplifies both gains and losses

Answer

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?

Accepted Answer

Revaluing positions at current market prices daily

Answer

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.

Trading Jobs Practice Test

Trading Jobs Practice Test

Trading Jobs Trading Risk Management