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Company generates revenues in different currencies - FX risk exposure
Posted: February 17th, 2012, 3:57 pm
by Glabibou
Hello,I am currently working on a company that has operations accross multiple geographies and generates revenues in 10 different currencies but reports everything in USD.I would like to have a view on the risk resulting from volatility on the FX market on my revenues in USD and I am having a hard time finding a smart way to do it.In the end, I would like to be able to write something like "Given the historical variations in the different FX rates vs. USD and their correlation, 2012 budgeted revenues of USD300m have a 95% chance to be in the USD270-USD330m range".Does that make sense and what's the best way to model that?Thanks
Company generates revenues in different currencies - FX risk exposure
Posted: February 17th, 2012, 5:37 pm
by rmax
The firm's FX desk should sell-off the daily PL to reduce the FX risk. Most firms have this policy.
Company generates revenues in different currencies - FX risk exposure
Posted: March 7th, 2012, 1:22 pm
by Maursh
VAR (value-at-risk) is the most commonly used for assessing a portfolio value, which assumes the portfolio is fixed into the future. But here you have a stochastic element to your "currency portfolio" in the p/l being uncertain.
Company generates revenues in different currencies - FX risk exposure
Posted: March 7th, 2012, 9:41 pm
by Stale
Look at this as a weighted sum of pnl in different currencies. Break it into parts (e.g. different time periods) and currencies. Having N time-buckets and M currencies would leave you with a NxM matrix on which you could to PCA using historical FX-rates to find covariance. Applying this to your current FX-exposure should give some result?