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:

StepCalculationComment
1. Choose a probability of loss5%=95% confidence worst-case loss
2. Measure value in USD$100 millionAssuming 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.

Data Science in Finance: 9-Book Bundle

Data Science in Finance Book Bundle

Master R and Python for financial data science with our comprehensive bundle of 9 ebooks.

What's Included:

  • Getting Started with R
  • R Programming for Data Science
  • Data Visualization with R
  • Financial Time Series Analysis with R
  • Quantitative Trading Strategies with R
  • Derivatives with R
  • Credit Risk Modelling With R
  • Python for Data Science
  • Machine Learning in Finance using Python

Each book includes PDFs, explanations, instructions, data files, and R code for all examples.

Get the Bundle for $39 (Regular $57)
JOIN 30,000 DATA PROFESSIONALS

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Data Science in Finance: 9-Book Bundle

Data Science in Finance Book Bundle

Master R and Python for financial data science with our comprehensive bundle of 9 ebooks.

What's Included:

  • Getting Started with R
  • R Programming for Data Science
  • Data Visualization with R
  • Financial Time Series Analysis with R
  • Quantitative Trading Strategies with R
  • Derivatives with R
  • Credit Risk Modelling With R
  • Python for Data Science
  • Machine Learning in Finance using Python

Each book comes with PDFs, detailed explanations, step-by-step instructions, data files, and complete downloadable R code for all examples.