hard · 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 is a risk concept that technically applies only to credit risk, never to market risk exposures.
- Marginal VaR is only an accurate measure when portfolio returns follow a normal distribution assumption.
- A Marginal VaR reading of exactly zero implies that the position is currently functioning as a perfect portfolio hedge.
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