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VALUE-AT-RISK (VAR) MODELS APPLICATION IN THE EVALUATION OF EXCHANGE RATE RISK ON THE EXAMPLE OF SELECTED BANK

TitleVALUE-AT-RISK (VAR) MODELS APPLICATION IN THE EVALUATION OF EXCHANGE RATE RISK ON THE EXAMPLE OF SELECTED BANK
Publication TypeConference Proceedings
Year of Publication2013
AuthorsDreca, N, Ganić, M
Conference NameEUROPEAN CONFERENCE IN TECHNOLOGY AND SOCIETY EuroTecS-2013
Date PublishedJuly 2013
PublisherInternational University of Sarajevo
Place PublishedSarajevo, Bosnia and Herzegovina
Other NumbersISSN 2303-4580
Abstract

The purpose of this study is to explain how Value- at-Risk (VaR)  model is used in determination of the amount of the risk. In this
paper author tests some of market VaR models in evaluation of  exposure to exchange rate risk. In the concrete Bank three VaR
models are applied and comparison of the results is done. In this  study exposure to foreign exchange rate was observed and this
research applied the calculation of the VaR to the selected bank and  explains how concept of the VaR helps bank to determine the risk  exposure and how to ensure enough economic capital to cover losses
that can be caused by foreign exchange risk exposure and  fluctuations in exchange rates. As results show, we applied three
different VaR methods in order to calculate amount of the economic  capital that bank needs to cover the losses caused by fluctuation in  the exchange rate. These methods include: Historical Method, Risk  Metrics  TM (Variance-Covariance Method) and Monte Carlo  Simulation. As it is shown VaR results are different in all market  VaR models. By Risk MetricsTM model the largest VaR amount is  obtained and by Historical Model, the smallest amount is obtained.  These differences come from the different assumptions on which  these models are based. The example includes portfolio of different  position, and different currency and show that bank which diversify  its portfolio will have lower exposure to risk as well as if it keeps  itself from having long position in the currency that is more exposed  to fluctuation in rate than others.