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.


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 =
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.

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