Variance - Covariance risk value model for currency market

Abstract

Developing international market increases the number of international payments. At the same time the number of currency exchange transactions also increases. Every year the amount of exchange operations grows together with the profits of market participants. The majority of these market participants faces currency exchange rate fluctuations, because there is a lack of currency rate forecasting model helping to operate on the market profitably for a longer period. This influences the need for various currency rate risk management models development. Investing in international currency market, it is very important to know what types of risk can be met and what level of risk is related with one or another currency position opening. That is why for selection of investment decisions it is very important to estimate and manage risk. For risk valuation different mathematical - statistical methods are used, however, most of them estimate risk separated from the trade model and with known trade results. It is not an occasion that models become more popular. This allows to valuate risk in advance, moderate it and calculate possible foreign currency positions. Paper analyzes possibilities of risk management using value at risk (VaR) methods, theoretical presumptions of VaR method applications are also discussed. The authors of this paper present complex variance - covariance VaR model, which allows to moderate rate risk of a given currency. Proposed model is tested using regressive testing with real currency market data, aiming to estimate the reliability level of the proposed model. Calculation data allows to make conclusions that model is reliable and ready for practical use.