Consider, for instance, two traders who each generated a profit of $10 million over the last year. The first is a foreign currency trader, the second a bond trader. The question is: How do we compare their performance? This is important in order to provide appropriate compensation as well as to decide which line of activity to expand. Assume the FX and bond traders handle notional amounts and volatilities as described in Table 25-1. The bond trader deals in larger amounts, at $200 million, but in a market Y with lower volatility, at 4 percent per annum, compared to $100 million and 12 percent for the FX trader. The risk capital (RC) can be computed as a VAR measure, say at the 99 percent level over a year, as Bankers Trust did. Assuming normal distributions, this translates into a risk capital.
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