How to compute returns and daily VaR of a currency position?
How to compute returns and daily VaR of a currency position?
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vkrouglov · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: vkrouglov
Original post: https://quant.stackexchange.com/questions/21045
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
I have a Forex trading account with a base currency USD. I am holding a position in EUR/JPY and would like to estimate my daily VaR. If I compute the EUR/JPY returns using the historic prices this would not be the right way of doing it, since it would give me returns in JPY which need to be further converted to USD.
What is the correct way for me to compute the VaR and the underlying returns?
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Sergey Bushmanov · External communityPost link
External answer — Quantitative Finance Stack Exchange
Author: Sergey Bushmanov
Original post: https://quant.stackexchange.com/a/21065
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Apply your trading strategy to history.
Convert account equity to USD by applying historical USD/JPY rates.
Calculate VAR/returns as usual.
Remember, VAR calculated in such a way will underestimate the impact of extreme events: i.e. 95% VAR will return you minimum of what you can lose on 5% trading days.
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Quoted from Forex.com.bd-Editorial External question — Quantitative Finance Stack Exchange Author: vkrouglov Source score (net votes, not local likes): 6 Original post: https://quant.stackexchange.com/questions/21045 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I have a Forex trading account with a base currency USD. I am holding a position in EUR/JPY and would like to estimate my daily VaR. If I compute the EUR/JPY returns using the historic prices this would not be the right way of doing it, since it would give me returns in JPY which need to be further converted to USD. What is the correct way for me to compute the VaR and the underlying returns?
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