Solutions

To identify missing risk factors, the risk measurement method should be compared
with the positions held by the trading desk in question. It is often helpful to discuss
sources of risk with traders, as they often have a good idea of where the main risks of their positions lie. A risk factor could be missed if instruments’ prices depend on
a factor outside the four broad risk categories usually considered (e.g. prices of
mortgage backed securities depend on real estate values). Also, positions may be
taken that depend on spreads between two factors that the risk measurement system
does not distinguish between (e.g. a long and a short bond position both fall in the
same time bucket, and appear to hedge each other perfectly).
When volatility increases suddenly, a short observation period could be substituted
for the longer observation period usually used for calculating extreme moves. Most
regulators allow this if the overall risk figure increases as a result.
Mapping of business units for P&L and risk calculation should be the same. When
this is a problem with banking and trading book positions held for the same trading
desk, P&L should be broken down so that P&L arising from trading book positions
can be isolated.