Foreign Exchange Value-at-Risk with Multiple Currency Exposure: A Multivariate and Copula Generalized Autoregressive Conditional Heteroskedasticity Approach

Abstract

Large DND projects and acquisitions are exposed to more than one foreign currency at the same time which complicates managements foreign exchange risk assessments. We extend the Centre for Operational Research and Analysis (CORA) in-house Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models to a full multivariate setting. Our extensions involve two models types: multivariate GARCH and copula-GARCH. We find that both models give qualitatively similar value-at-risk (VaR) estimates, and that both models provide a much improved risk assessment relative to the current practice-correcting VaR estimates on the order of 25% in cases in which multiple currency exposures are of similar size. Using the USDCAD, the EURCAD, and the GBPCAD, we demonstrate estimation techniques for each model. Finally, we show the strength of our improved models through a 100-day VaR calculation.

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Document Details

Document Type
Technical Report
Publication Date
Nov 01, 2014
Accession Number
AD1003599

Entities

People

  • David W. Maybury

Organizations

  • Defence Research and Development Canada

Tags

Communities of Interest

  • C4I
  • Energy and Power Technologies
  • Materials and Manufacturing Processes

DTIC Thesaurus Topics

  • Acquisition
  • Business Administration
  • Classification
  • Distribution Functions
  • Engineering
  • Maximum Likelihood Estimation
  • Military Acquisition
  • Money
  • National Security
  • Operations Research
  • Random Variables
  • Risk
  • Risk Analysis
  • Risk Management
  • Security
  • Standards
  • Time Dependence

Fields of Study

  • Mathematics

Readers

  • Aviation Safety Risk Assessment.
  • International Relations and European Studies
  • Regression Analysis.