tailieunhanh - Lecture International finance: An analytical approach (2/e) – Chapter 13: Foreign exchange risk and exposure

Lecture International finance: An analytical approach (2/e) – Chapter 13: Foreign exchange risk and exposure. The goals of this chapter are: To define risk and exposure, to introduce value at risk (VAR), to distinguish among transaction, economic and translation exposure. | Chapter 13 Foreign Exchange Risk and Exposure Objectives To define risk and exposure. To introduce value at risk (VAR). To distinguish among transaction, economic and translation exposure. Definitions of Risk The chance of bad consequence, loss, etc. (The Concise Oxford Dictionary). The possibility of loss, injury, disadvantage or destruction (Webster’s Dictionary). Definitions of Risk (cont.) The origin of the word ‘risk’ is either the Arabic risq or the Latin risicum. Definitions of Risk (cont.) In finance, a distinction is made between risk and uncertainty. In finance, risk is measured by the dispersion around the mean value of the rate of return, the cost of borrowing, the value of assets and liabilities, etc. FX Risk FX risk arises because of uncertainty about the future spot exchange rate. It refers to the variability of the domestic currency value of certain items resulting from the variability of the exchange rate. Rate of Return Measuring Risk: Probability Distribution Measuring Risk: Historical Data Value at Risk VAR is a new approach to risk measurement and management. Over a given period of time with a given probability, how much money might be lost on a certain position? Measurement of VAR Measurement unit (. AUD) Time horizon (one day, one week, etc.) Probability (1-5%) Implementation of VAR Analysis Parametric (analytical) approach Historical approach Simulation approach VAR: Pros It is simple. It is suitable for risk-limit setting and performance measurement. It can take account of complex movements. VAR: Cons It can be misleading. VAR estimates are highly sensitive to the underlying assumptions. It cannot cope with sudden or sharp changes. VAR: Conclusion VAR is useful but it should be handled with care and used in conjunction with other measures of risk. Exposure Risk measures the probability and magnitude of deviation from some expected outcome. Exposure is a measure of the sensitivity of what is at risk to the source of risk. FX Exposure . | Chapter 13 Foreign Exchange Risk and Exposure Objectives To define risk and exposure. To introduce value at risk (VAR). To distinguish among transaction, economic and translation exposure. Definitions of Risk The chance of bad consequence, loss, etc. (The Concise Oxford Dictionary). The possibility of loss, injury, disadvantage or destruction (Webster’s Dictionary). Definitions of Risk (cont.) The origin of the word ‘risk’ is either the Arabic risq or the Latin risicum. Definitions of Risk (cont.) In finance, a distinction is made between risk and uncertainty. In finance, risk is measured by the dispersion around the mean value of the rate of return, the cost of borrowing, the value of assets and liabilities, etc. FX Risk FX risk arises because of uncertainty about the future spot exchange rate. It refers to the variability of the domestic currency value of certain items resulting from the variability of the exchange rate. Rate of Return Measuring Risk: Probability Distribution .