Explain the limits used to control market risk, among them stop-loss limits, scenario limits, position limits, and risk budgeting

Risk budgeting sets a total amount of risk, measured by VaR, tracking error or another metric, and allocates it among desks, asset classes or managers, ideally where expected return per unit of risk is highest. Position limits cap the size of individual exposures, such as a maximum amount in one issuer, sector or country; they control concentration but ignore correlations. Scenario limits cap the loss permitted under a specified stress. Stop-loss limits force a position to be cut once losses reach a threshold; they limit damage but can crystallise losses at the worst moment and may encourage traders to take on more risk to recover. The trap is expecting any single constraint to cover every risk.