Models for simulating FX movements

Models for simulating FX movements

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Nicholas An · External communityPost link
External question — Quantitative Finance Stack Exchange Author: Nicholas An Original post: https://quant.stackexchange.com/questions/8272 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. My goal is to develop a model to simulate long term FX movements. (I am not sure if long term makes any difference, but if it does I am more interested in long term fx movements) These Monte Carlo simulations will not be used for pricing but from a risk-management perspective, to calculate how much the portfolio is exposed to FX risk. I was wondering if there is a suggested model (or paper or anything) that I could use as a starting base. Some further notes, after Matt's comment: I am not interested in some sort of a trading strategy (i think i misused the words: portfolio and exposure). And i don't want to hedge or price anything. Imagine that you have lend some money (through some instrument) that you will receive in 20-30 years in a foreign currency. Now you believe that forex rates have some correlation with your instrument and some other factors and you want to see how much you stand to lose in a worst case scenario. My idea was that I would run an MC where i will have some sort of forex evolution correlated with the evolution of my instrument and i set up some sort of a stress test. Is my line of thinking correct, or you believe that i should be trying something else? If we agree that my approach is decent, my question is how would you evolve a forex rate.
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Quoted from Forex.com.bd-Editorial External question — Quantitative Finance Stack Exchange Author: Nicholas An Source score (net votes, not local likes): 3 Original post: https://quant.stackexchange.com/questions/8272 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. My goal is to develop a model to simulate long term FX movements. (I am not sure if long term makes any difference, but if it does I am more interested in long term fx movements) These Monte Carlo simulations will not be used for pricing but from a risk-management perspective, to calculate how much the portfolio is exposed to FX risk. I was wondering if there is a suggested model (or paper or anything) that I could use as a starting base. Some further notes, after Matt's comment: I am not interested in some sort of a trading strategy (i think i misused the words: portfolio and exposure). And i don't want to hedge or price anything. Imagine that you have lend some money (through some instrument) that you will receive in 20-30 years in a foreign currency. Now you believe that forex rates have some correlation with your instrument and some other factors and you want to see how much you stand to lose in a worst case scenario. My idea was that I would run an MC where i will have some sort of forex evolution correlated with the evolution of my instrument and i set up some sort of a stress test. Is my line of thinking correct, or you believe that i should be trying something else? If we agree that my approach is decent, my question is how would you evolve a forex rate.

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