Applied risk management series: Active VAR management

In this article, Carlos Blanco introduces a set of tools to assist traders and risk managers in actively managing the value-at-risk of energy derivatives portfolios

Over the past 20 years, value-at-risk has been gradually gaining acceptance as a key market risk control tool for trading portfolios. VAR is used to set market risk limits at various levels of the portfolio hierarchy, as well as to determine risk-adjusted performance.

From a risk control perspective, VAR is often treated as a binary variable. According to this line of thinking, as long as a trading book is below its VAR limit, then no action is required. However, once traders approach or exceed