Conditional Value-At-Risk and Currency Hedging

Leonard Arvi and Danny Ervin

This study evaluates the efficacy of the transaction exposure (value-at-risk, or VaR) for a multinational corporation (MNC) conducting business in sixteen specific currencies for the 2011-2016 time period. The approaches include traditional VaR (also called the variance-covariance approach), modified MVaR and conditional CVaR. More specifically, the maximum 1-day holding period loss is computed and compared across the three approaches to provide practical information to assist MNCs in understanding the extent to which each version of value at risk can be beneficial over time. These results also provide MNCs critical information in determining howthey should hedge this risk and which currencies to hedge. Events like Brexit and other significant events impact MNCs currency risk. By knowing what is the maximum loss conditional on a specified VaR will immensely help firms manage their currency risk much more precisely.

DOI : https://doi.org/10.21102/gefj.2018.03.111.01