Abstract
Value at Risk method became one of the most used tools in bank management in order to estimate the losses resulting from a foreign currency portfolio. The study aims to estimate the maximum loss for the euro currency due to exchange rate volatility by establishing VaR, starting from the method based on historical simulations. The sample of the research consists of the four commercial banks listed on the Bucharest Stock Exchange (BSE), respectively: Romanian Commercial Bank SA (member of Erste – BCR Group); Romanian Development Bank – Groupe Societe Generale (BRD); Transylvania Bank SA (BT) and Carpatica Bank (BCC), based on a number of 757 observations corresponding to the working days in the period 1 January 2012 – 31 December 2014. The results obtained from the research showed that in case of the analyzed banks the maximum anticipated loss in a future time horizon of 10 days, with a relevance of 1%, does not exceed 2% of the net positions on the euro currency. The study could not be extended to other currencies, because in the information available for the four commercial banks only the net position on the euro currency is separately expressed.
Highlights
The definition attributed to the Value at Risk (VaR) method explains the significance of the results, indicating the estimated maximum loss of a portfolio of financial instruments on a short fixed-time period, and the use of the method involves arbitrary choice of two parameters: holding period of the instruments, namely, the timing and level of relevance
The study aims to estimate the maximum loss for the euro currency due to exchange rate volatility by establishing VaR, starting from the method based on historical simulations
The sample of the research consists of the four commercial banks listed on the Bucharest Stock Exchange (BSE), respectively: Romanian Commercial Bank SA; Romanian Development Bank – Groupe Societe Generale (BRD); Transylvania Bank SA (BT) and Carpatica Bank (BCC), based on a number of 757 observations corresponding to the working days in the period 1 January 2012 – 31 December 2014
Summary
The definition attributed to the Value at Risk (VaR) method explains the significance of the results, indicating the estimated maximum loss of a portfolio of financial instruments on a short fixed-time period, and the use of the method involves arbitrary choice of two parameters: holding period of the instruments, namely, the timing and level of relevance. The VaR method is mostly used in assessing maximum loss resulting from the manifestation of various risk categories. The history of VaR is related to the investment bank JP Morgan, whose president had a decisive role in its development. The creation of the Risk Metrics department in this bank – specialising only in the study and analysis of the risk – has led to a measure of risk popularised as the Value at Risk. This method was been assigned a particular importance in 1993, in the Report of the Group of 30
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