medium · Frm Part 2 Risk & Investment Management
A desk head argues that a position has 'zero risk' because its Marginal VaR is currently zero.
According to the risk decomposition framework, why is this conclusion dangerous for large trades?
- Marginal VaR is a local derivative; as the position size increases, the beta to the portfolio rises mechanically.
- Marginal VaR only applies to credit risk, not market risk.
- Marginal VaR is only accurate for normally distributed returns.
- Zero Marginal VaR implies the position is a perfect hedge.
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