VaR - International Portfolio

Discussion on Value-at-Risk Models
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cristinabb
Posts: 1
Joined: Fri Jun 08, 2012 9:55 am

VaR - International Portfolio

Postby cristinabb » Thu Jul 19, 2012 9:42 am

Dear Mrs. Alexander,

I have a question regarding the computation of VaR for an International Portfolio.

I formed an international portfolio where I used all the steps from your book. I saw that you used the domestic/foreign exchange rate, what would be the reason for this? Is to avoid changing the final return from a foreign currency to the domestic one?

I am having problems trying to figure out what is the initial and final value of the portfolio. If I invest 1 pound in the portfolio and this would be the initial portfolio value, how do I calculate how much it represents since I am investing in a market index and this is expressed in points? Also, the final value of the portfolio, expressed in domestic currency, it's calculated by multiplying the return (which is expressed in domestic currency) with the initial value of the portfolio (e.g. calculate the P/L for the entire period) ?

Thank you!

coalexander
Posts: 815
Joined: Sun Sep 28, 2008 10:30 pm

Re: VaR - International Portfolio

Postby coalexander » Thu Jul 19, 2012 10:33 am

Hello,

Yes, the XRs are there to convert all security returns into domestic returns. If you have only one foreign exposure this is not necessary, either domestic or foreign currency will do. But if you have two different foreign exposure, you need to choose a common base for all exposures, which is usually domestic currency because risk capital charges are in domestic currency.

Just take the return on the market index. If the return is 10%, then the final value starting from 1 will be 1.1.

If returns are in domestic currency, then make sure the start value is also in domestic currency, then final value and P/L will also be in domestic currency.

Cheers, Carol


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