We reduced the risk on a portfolio of 2 billion Euro, from a about a billion Euro to a risk of about 50 million Euro using hedging. The remaining 50 million was mostly basis risk, i.e., the mismatch between the underlying instruments in the liabilities and the hedge assets.
Using a similar logic to yours, senior management argued that we introduced a new risk called basis risk by trading derivatives.
With respect, this seems like numbers were plucked out of somewhere. I propose that, if these come from a statistical model, it's the model that paints your position in the most optimistic light.
I don't judge you for that, but you should really read this article and look out for other fallacies of statistics.
Now let's say you are bullish on the stock and borrow $400 to buy 5 stocks. In the same model, after gain or loss is realized and $400 is returned to the creditor after one week you are either $50 poorer or $50 richer, your magnitude of risk grew 5-fold by leveraging.
Risk management looks at the usual processes via stochastic modelling, but you need to also make scenario analysis, where you just make a deterministic event happen and then measure the effect on the value of your portfolio.
The risk is probably about 40% of the 2 billion.
Also, so-called Black swans could occur only within such models. There is no chance that one day c or even g could change (no matter what "scientists" used to say in journals).
Btw, finance is a business, not science.)
Well the thing is, c is defined in metres per second. And since 1983, the metre "has been defined as 'the length of the path travelled by light in vacuum during a time interval of 1/299,792,458 of a second.'".[0]
Since 1983, c is defined as constant.
The very idea of modeling dynamic abstract processes such as finance markets, which itself are mere abstractions is a non-science, it is misuse of pseudo-scientific methods and mathematics, and what we have seen so far is nothing but failures.
Too abstract or flawed abstractions and wrong premises cannot be fixed by any amount of math or modeling. They only has to be discarded.
The famous "subject/object" false dichotomy in philosophy is the good example too. People could spent ages modeling reality using non-existent abstractions.
Today all these multiverse "theories" are mere speculations about whether Siva, Brama or Visnu is the most powerful, forgetting that all these were nothing but anthropomorphic abstractions of the different aspects of one reality.
The notion that so-called "modern science" is a new religion (a contest of unproven speculations) is already quite old.
btw, a good example of the reductionist mindset (instead of pilling up abstractions) could be the Upanishadic reduction of all the Gods to one Brahman, to which Einstein accidentally discovered a formula - E = mc2, where c is a constant, implying that there is no time in the Universe).