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Exchange rate exposure (jpy & $)

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Exchange rate exposure (jpy & $)

  1. 1. EXCHANGE RATE EXPOSURE Veennee Shakya International Finance 20/08/2017
  2. 2. CONTENT Value at Risk explanation Hypothetical Equivalence of Currency Solution of Given Equation Hedging Risk Module Conclusion
  3. 3. VALUE AT RISK
  4. 4. VALUE AT RISK  Developed by the chairman of JP Morgan, Dennis Weatherstone.  Shows inherent risk summarized form of the institutions  A simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. (Gupta, 2017)  This system asks the management to minimize the risk factor  We must know the probability of risk and its hardship.
  5. 5. UNHEDGEABLE RISK (HISTORY)
  6. 6. UNHEDGEABLE RISK SIMPLE EXAMPLE Natural Calamities
  7. 7. PORTFOLIO OF 5000 CHF AND 10000 JPY 5000 10000 Total Equivalent USD Difference Date USD/CHF USD/JPY Standard Deviation (σ) Variances Hypothetical 12-Aug-17 1 100 5100 11-Aug-17 1.3615 109.06 3764.112771 -1335.887229 401.2524867 20.03128769 1021.595672 10-Aug-17 1.3634 109.37 3758.735084 -5.377687496 3.926061934 1.981429265 101.0528925 09-Aug-17 1.3643 110.04 3755.759135 -2.975948312 3.250462521 1.802903914 91.94809959 08-Aug-17 1.3638 110.74 3756.528327 0.769191525 2.702156942 1.643823878 83.83501777 07-Aug-17 1.3634 110.76 3757.587634 1.059307128 2.714099285 1.647452362 84.02007046 06-Aug-17 1.3604 110.76 3765.674893 8.087258892 2.6979802 1.642552952 83.77020056 05-Aug-17 1.3588 110.12 3770.527423 4.852530281 2.044123159 1.429728352 72.91614593 04-Aug-17 1.3585 110.43 3771.085099 0.557675969 2.061128319 1.435663024 73.21881424 03-Aug-17 1.3579 110.33 3772.79345 1.708350984 1.840950812 1.356816425 69.19763769 02-Aug-17 1.3559 110.38 3778.183703 5.390252608 0 0 0 VaR= 1021.59
  8. 8. REMARK  Variance is Square root of respective Standard deviation (σ).  The highest loss is VaR 1021.59  This shows the 95% confidence, and maximum loss will not further exceed $1021.59 in a single day.
  9. 9. HEDGING Future Forward Option Swap
  10. 10. Option Contract
  11. 11. CONCLUSION VaR summarizes the total risk of the portfolio of financial assets but it doesn't give the exact possibility of future. It depends upon three parameters which are confidence level, holding period and unit of currency with three different methodologies of Value at Risk which are Historical Simulation, Variance Covariance method and Monte Carlo Simulation. This assumes mark-to- market pricing and no trading portfolio. (Jorion, 2006)
  12. 12. REFERENCES:  Gupta, S. (2017). Financial Derivatives THEORY, CONCEPTS AND PROBLEMS. New Delhi: PHI Learning Pvt. Ltd.  Jorion, P. (2006). Value at Risk: The New Benchmark for Managing Financial Risk. New York: McGraw-Hill.  Reserve, F. (2017, June 18). FRB. Retrieved 08 18, 2017, from The Fed A-Z Index: https://search.newyorkfed.org/board_public/search?text=JPY+ to+CHF&Search=  Smiechewicz, W. J. (2002, September). The Barings Bank Case. Fraud Magazine, pp. http://www.fraud- magazine.com/article.aspx?id=4294968220.  XE. (2017). The world's Trusted Currency Authority. Retrieved August 18, 2017, from http://www.xe.com/currencycharts/?from=CHF&to=JPY&view= 1M

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