Question
Risk Ltd., a company based in Netherlands, has foreign trading assets in three major currencies, JPY, USD, and GBP. The company has a long position
Risk Ltd., a company based in Netherlands, has foreign trading assets in three major currencies, JPY, USD, and GBP. The company has a long position of JPY 770 million, a long position of USD 7.2 million, and a short position of GBP 6.4 million. Daily observations for the last 12 months show that the spot rates standard deviation is 1% for both JPY and GBP and 0.5% for USD. The correlation between EUR/JPY and EUR/GBP is +40%, between EUR/JPY and EUR/USD is +50%, and between EUR/USD and EUR/GBP is +30%. What is the risk (VaR) of the overall position over a 10-day interval at the 99% confidence level? Assume 0.80 GBP = 1 EUR, 1.2 USD = 1 EUR and 110 JPY = 1EUR.
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