What is aggregation on co-varied basis?
When the positions of 2 trading desks are aggregated at a division level, the risk at the division level is not the same as the sum of the risks at the 2 trading desks. This is primarily because there might be positions in the first trading desk that act as hedges to those in the second trading desk. Therefore, while arriving at the risk at the division level, it makes sense to compute this risk on co-varied basis, that is, by allowing hedge benefits to positions in the two desks. Co-Varied Risk Measure – The risk at a higher level is usually lower than the sum of the risks at the lower levels.
