FIN 424 SEU Justification for The Traders Statements Discussion

Question Description

I’m working on a finance question and need an explanation and answer to help me learn.

10.1 Learning Outcomes:

Discuss risk management as a process and the role risk governance plays.

Describe the risks associated with portfolio management.

Illustrate the application of risk budgeting under an enterprise risk management (ERM) system.

Discuss the advantages and disadvantages of Value at Risk as an appropriate measure.

10.2 Kindly go through:
Sue Ellicott supervises the trading function at an asset management firm. In conducting an in-house risk management training session for traders, Ellicott elicits the following statements from traders:

Trader 1. ‘‘Liquidity risk is not a major concern for buyers of a security as opposed to sellers.’’

Trader 2: ‘‘In general, derivatives can be used to substantially reduce the liquidity risk of a security.’’

Ellicott and the traders then discuss two recent cases of a similar risk exposure in an identical situation that one trader (Trader A) hedged and another trader (Trader B) assumed as a speculation. A participant in the discussion makes the following statement concerning the contrasting treatment:

Trader 3: ‘‘Our traders have considerable experience and expertise in analyzing the risk, and this risk is related to our business. Trader B was justified in speculating on the risk within the limits of his risk allocation.’’

10.3 (Question):

State and justify whether each trader’s statement is correct or incorrect.

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