FINS3630 Lecture Notes - Lecture 3: Foreign Exchange Market, Monte Carlo Method, Market Liquidity
Lecture 6: Foreign Exchange Risk
- Net exposure = (FX A – FX L) + (FX bought – FX sold) = net foreign A(i) + net FX bought
- Positive: FI net long in foreign currency- risk that foreign currency will depreciate against
home currency vs. negative
- Dollar loss/gain in currency(i) = net exposure in foreign currency(i) ÷ shock (vol) to the
dollar (foreign currency i exchange rate)
- Trade forex for export/import + trade forex for real/financial investments + hedging +
speculation
- Net return: return on assets – return on liabilities
- Hedging
o On BS: matching investment (initial and final)
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o OBS: using forwards
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Document Summary
Net exposure = (fx a fx l) + (fx bought fx sold) = net foreign a(i) + net fx bought. Positive: fi net long in foreign currency- risk that foreign currency will depreciate against home currency vs. negative. Dollar loss/gain in currency(i) = net exposure in foreign currency(i) shock (vol) to the dollar (foreign currency i exchange rate) Trade forex for export/import + trade forex for real/financial investments + hedging + speculation. Net return: return on assets return on liabilities. Hedging: on bs: matching investment (initial and final, obs: using forwards. Mr: risk related to u(cid:374)(cid:272)ertai(cid:374)t(cid:455) of fi ear(cid:374)i(cid:374)gs o(cid:374) its tradi(cid:374)g portfolio (cid:272)aused (cid:271)(cid:455) s i(cid:374) market conditions (price of a, ir, market volatility, market liquidity)- estimated potential loss under adverse circumstances (vs. investm portfolio- horizon, liquidity) Var: riskmetrics (var/cov approach), historic/bak simulation, monte carlo simulation. Dail(cid:455) pri(cid:272)e volatilit(cid:455) = md * rate.
