Due to the correlation coefficient between currency pairs the individual VARs of currency pairs do not add up to give a portfolio VAR. This shows that VAR is not sub-additive.

1. hisham's writing pad/risk metrics /FX
ADVANCED VAR CALCULATION
FOR PORTFOLIO OF CURRENCIES
BASEL III
Requires a stressed VAR
At a 99% Confidence Interval
And over time Horizon of 10 days

2. hisham's writing pad/risk metrics /FX
VARIANCE COVARIANCE APPROACH TO CALCULATING
VAR OF FX PORTFOLIO

3. hisham's writing pad/risk metrics /FX
Steps to calculate portfolio VAR
● Take 30 days of FX EUR/USD and EUR/GBP data and correlation coefficient of the two
currency pairs from say Oanda.com
● Calculate log normal price returns daily using excel function LN() for each currency pair
● Calculate the period standard deviation using excel function STDEV
● Now calculate daily STDEV using square root rule
● Obtain portfolio STDEV using portfolio weights (w1 & w2), daily STDEV for each
currency pair, correlation coefficient substitute in the formulae for variance covariance
approach
● Next determine value for required Confidence Interval using NORMSINV function
● Set Horizon at 10 days
● Now calculate VAR = daily STDEV of portfolio x root of 10 x value returned by
NORMSINV function for a CI of 99%
● VAR is not sub-additive as individual VARs do not add up to give the portfolio VAR,
reason being correlation is taken into account