Answer-first summary for fast verification
Answer: Stop loss limits are typically used to limit realized losses.
## Explanation **A is correct.** Stop loss limits are a loss threshold at which an associated action takes place (e.g., closing out the position). These limits will not prevent future exposure, only limit realized losses. **B is incorrect.** Concentration limits are limits on concentrations of various kinds (e.g., to individual counterparties or product types). These limits must be set with the understanding of correlation risks. They may not capture correlation risks in stressed markets. **C is incorrect.** VaR suffers from all the classic model risks and may be misinterpreted by senior management. Specifically, VaR does not indicate how bad a loss might get in an unusually stressed market. **D is incorrect.** Sensitivity tests look at the sensitivity of a position or portfolio to changes in key variables. They are not limited to measuring the change in value of derivatives.
Author: LeetQuiz .
Ultimate access to all questions.
The CRO of a commodity trading firm is reviewing the hedging strategies used by the traders at the firm. The CRO notes that the traders often use dynamic hedging strategies to manage the price fluctuations of their positions and that they apply a wide-ranging limit system in controlling the hedging positions. Which of the following conclusions would the CRO most likely reach when reviewing the hedging strategies of the traders?
A
Stop loss limits are typically used to limit realized losses.
B
Concentration limits are very effective in capturing correlation risks during stressed market conditions.
C
VaR models are not affected by classic model risks, which are typically associated with traditional mathematical models.
D
Sensitivity tests are limited to measuring the change in value of derivatives.
No comments yet.