Variance – Covariance Risk Value Model for Currency Market

Abstract

Developing international market increases thenumber of international payments. At the same time thenumber of currency exchange transactions alsoincreases. Every year the amount of exchange operationsgrows together with the profits of market participants.The majority of these market participants faces currencyexchange rate fluctuations, because there is a lack ofcurrency rate forecasting model helping to operate onthe market profitably for a longer period. This influencesthe need for various currency rate risk managementmodels development.Investing in international currency market, it is veryimportant to know what types of risk can be met andwhat level of risk is related with one or another currencyposition opening. That is why for selection of investmentdecisions it is very important to estimate and managerisk. For risk valuation different mathematical –statistical methods are used, however, most of themestimate risk separated from the trade model and withknown trade results. It is not an occasion that modelsbecome more popular. This allows to valuate risk inadvance, moderate it and calculate possible foreigncurrency positions.Paper analyzes possibilities of risk managementusing value at risk (VaR) methods, theoreticalpresumptions of VaR method applications are alsodiscussed. The authors of this paper present complexvariance – covariance VaR model, which allows tomoderate rate risk of a given currency. Proposed modelis tested using regressive testing with real currencymarket data, aiming to estimate the reliability level of theproposed model. Calculation data allows to makeconclusions that model is reliable and ready for practicaluse.