Risk: The New Management Imperative in Finance

Market Risk in Portfolios 12

When you group a set of similar trades together, the aggregate market risk is almost inevitably less then the sum of market risks added up deal by deal. It is easiest to see this with the longs and shorts for the same item because they cancel each other out. For example, suppose you are long 10,000 Euros in 5 weeks and short 8,000 Euros in 4.5 weeks. Your net market exposure is long 2,000 Euros for 4.5 weeks and long 10,000 Euros between 4.5 weeks and 5 weeks. This is considerably less than the risk in the two separate positions. When you look at the offsets in a portfolio of 100 or 200 Euro positions, say, equally balanced between longs and shorts, we can see a net Euro position through time that is much closer to ...