FIN 424 SEU Justification for The Traders Statements Discussion

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.