Risk of a Single Cash Position

BetaSquare are a USD-based firm with one asset: JPY 14 billion in cash. What is the 95% worst-case loss over a 1-day period?

You have the following information:

The daily price volatility of the JPY/USD exchange rate is 1.78%, using a 95% confidence level. (Note: This implies that 1 standard deviation equals 1.78%/1.65 = 1.08%.)
The JPY/USD exchange rate is 140.

Solution:

Step	Calculation	Comment
1. Choose a probability of loss	5%	=95% confidence worst-case loss
2. Measure value in USD	$100 million	Assuming 140 JPY/USD
3. 1-day volatility JPY/USD (or 1.65 standard deviations)	1.78%	Data Set
4. Calculate Risk	$100 million * 1.78 = $1.78	Market value volatility

This means that your 95% worst-case loss due to adverse movements in the JPY IUSD over 1 day would be $1.78 million (or, you have a 5% chance of losing $1.78 million or more overnight). Now let's view an example of two cash positions. To calculate the total risk of two or more positions, however, we need to include correlations.

Risk of a Single Cash Position

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