Introduction To Daily Logarithmic Returns Is Done By Reviewing Both Return And Risk Profile For Data

1662 Words Sep 9th, 2015 7 Pages
This study employs the adjusted price of GBP exchange rates for 12 different currencies where BNKR’s investments are dominated in, during the period of January 2010 till July 2015. The total number of daily logarithmic returns of each exchange rate is 1455. The daily logarithmic return is defined as:
R_t=ln*((P_t-P_(t-1))/P_(t-1) )
Where P_t is the adjusted spot exchange rate at time t. The descriptive statistics summary of daily logarithmic returns is reported in Table 1. Therefore, assessing the exposure of currency risk was done by reviewing both return and risk profile for data sets.

Secondly, for the assessment of currency risk’s exposure, VaR method based on incorporated volatility using EWMA approach is used as the main currency risk measure. In this study, the value of VaR is calculated for each exchange rate with a confident level of 99% and a decay factor (lambda =0.94) for the next trading day in 31 of July-2015. As long as VaR is more extreme measure than standard deviation, it is naturally that VaR would be much higher than standard deviation.
Since the average standard deviation of the developed markets is around 0.6% compared with the 0.71% in the devolving markets, it indicates that the Risk and VaR value in the developed markets (1.5%) is less than the developing countries (1.71%). Hence, VaR showed that investing in US and Swiss markets have the lowest currency risk in the developed markets, and investing in Pero and Mexico have the lowest one in…

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