Risk management is supposed to protect against the what if scenarios. Clearly, most risk managers stress test their what if scenarios in the negative, because risk mitigation strategies are all about whether the market is going to go against your position and how traders can trade out of bad positions.

Most of the risk management tends to happen using historical analysis, and more specifically looking at the market extremes seen. This is dangerous when we look at the way the market has been in the last 2 months, because historically we have not seen this for many years, or arguably ever. So what do risk managers do in these circumstances. Some will look at the most volatile year (2005) and look to inverse this and create a bear market. Some will look at VaR calculations and assume that their historical volatility will cover all eventualities.

Others will not worry because they have a view that a falling market is more manageable than a rising one on the premise that prices cannot go negative...... (well the gas market might have something to say about that!)

Good traders and risk managers will recognise that the market cannot go on falling forever, and that eventually demand will kick in and that prices will start to rise. Historically this happens in November and then they proceed to fall to new lows in February, one suspects that a rise will occur but it might be short lived and if one looks at the inverse of 2005 then we could easily see a slight rise in October only for a steady fall in November and December. One thing is for certain the bears have not gone away and the prospect of a quick rise up is less and less.