A Comparison of Value-at-Risk Approaches For Multinational Enterprises

Kashi Khazeh, Leonard Arvi and Robert C. Winder

This study evaluates and compares the efficacy of two competing approaches to value-at-risk for determining the transaction exposure of a multinational enterprise (MNE) conducting business in six specific currencies covering the 2011-2012 time period. These approaches are: 1) traditional value-at-risk (VaR), also called the variance-covariance approach, and 2) modified value-at-risk (MVaR). Specifically, the maximum 1-day holding period losses for these two approaches are estimated and compared to provide practical information to assist MNEs in accurately estimating their transaction exposure. It is found that traditional VaR may significantly underestimate transaction risk. These findings also provide MNEs critical information for determining if they should, or should not, hedge this risk. If they opt to hedge, they will, perforce, need to consider the real cost of hedging as well as which hedging technique to employ.

DOI : http://dx.doi.org/10.21102/irbrp.2014.03.101.03