Technology: Understanding hedges can keep you employed

Abstract

As Chris Trader pulled into his parking spot he felt uneasy. Chris was a trader for a retail energy supplier to commercial and industrial customers. Recently, a very large position he held in his portfolio started to lose money. When the markets closed the day before, the position was very close to its Value at Risk (VaR) limit (see Value at Risk). Chris knew that if the markets continued down today, he would be forced to sell the position, and thus lock in a very large loss for his company. Looking back over the last few weeks, Chris knew there were red flags that should have warned him that the position was in trouble, but he missed those and now it was too late.