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VaR of Forward Foreign Currency Contract

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).

https://www.youtube.com/watch?v=Um8e\_teI\_dw

This video is developed by David from Bionic Turtle.

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Undiversified Bond Value at Risk (VaR)

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VaR Mapping

6 lessons

01
Mapping a Fixed Income Portfolio to Risk Factors
02
Bond Returns Value at Risk (VaR) as Bond Risk
03
Mapping a European Stock Option
04
VaR of Forward Foreign Currency Contract
05
Undiversified Bond Value at Risk (VaR)
06
Diversified Bond Value at Risk (VaR)

Topics

Risk Management