Assessing Foreign Exchange Risk Associated to a Public Debt Portfolio in Ghana Using the Value at Risk Technique

Abstract

VaR is a potential loss. The VaR methodology gives the definition to risk-based capital, or economic capital and confidence level reflects the risk appetite of the bank. This work is a delta-normal VaR application in the case of the Ghanaian economy. It assesses the exchange risk associated to the Ghana public debt portfolio. We used daily spot exchange rates of the Ghana cedi against the three main currencies, the dollar, the euro and the pound. We are interested in the period from 04/01/2000 to 31/12/2009. We demonstrated that the VaR result is very high and that there is a need for the government to also trade in a currency that can serve as a potential hedge against risk.