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VaR of Forward Foreign Currency Contract

FRM Exam, Risk Management

This lesson is part 4 of 6 in the course VaR Mapping

First, we used the formula for the value of a forward contract to identify the three risk factors. This is the essential mapping idea: we characterize the portfolio as a set of exposures to underlying risk factors. In this case, a forward currency contract maps to a long position in a foreign currency spot rate, a long position in a foreign interest rate (EUR bill) and a short position in a domestic interest rate (USD bill).

Second, we develop input assumptions: VaR for the risk factors and the correlation matrix. Third, we use the formula for portfolio VaR: post-multiply R(xV) and then pre-multiply (xV)’R(xV).

This video is developed by David from Bionic Turtle.

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In this Course

  • Mapping a Fixed Income Portfolio to Risk Factors
  • Bond Returns Value at Risk (VaR) as Bond Risk
  • Mapping a European Stock Option
  • VaR of Forward Foreign Currency Contract
  • Undiversified Bond Value at Risk (VaR)
  • Diversified Bond Value at Risk (VaR)

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