Estimating VaR for Future Foreign Currency Income

Summary

The document asks how to estimate total foreign exchange risk for a series of future income payments in one foreign currency. It proposes summing each payment’s individual volatility based VaR, scaling volatility by the square root of its time to receipt, and asks whether that calculation is correct.

The text provides no answer or supporting analysis, so it does not establish whether the proposed aggregation is valid. In particular, it leaves open how currency exposures at different dates relate, what exchange rate and valuation horizon are assumed, and how the cash flows should be combined. These gaps limit the document to posing a risk measurement question rather than presenting a usable method.

Key ideas

• The document considers a series of future cash flows denominated in one foreign currency.
• It proposes summing individual volatility based VaR estimates using square root of time scaling.
• It asks whether this approach gives the total foreign exchange VaR but supplies no answer.

Tags

# VaR of future foreign currency income stream


# VaR of future foreign currency income stream












Assume I have a series of future incomes in a single foreign currency.

How do I calculate the total VaR for this forex risk using the volatility method?

My first thought was that I could simply add up the VaR for each future income, i.e. for receiving $V_1, V_2, ..., V_n$ at times $T_1, T_2, ..., T_n$ the 95% VaR would be:

$$\operatorname{VaR}_{0.95} = -1.65\sum_i{\sigma V_i \sqrt{T_i}}$$

but is this correct?

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