The Foreign Exchange Exposure Model (FOREX) Expansion

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Authors
  1. Desmier, P.E.
Corporate Authors
Defence R&D Canada - Centre for Operational Research and Analysis, Ottawa ON (CAN);Directorate Materiel Group Operational Research, Ottawa Ont (CAN)
Abstract
In January 2007, the theory and application of the FOREX (FOReign EXchange) risk assessment model was developed and applied to the Assistant Deputy Minister (Materiel) (ADM(Mat)) National Procurement and Capital (equipment) accounts to forecast the worse-case loss in expenditures at a specific confidence level over a certain period of time due to the volatility in foreign currency transactions. With the success of the original FOREX model, the Assistant Deputy Minister (Finance and Corporate Services) has a requirement to expand the model to include the original two ADM(Mat) accounts, national procurement and capital (equipment), plus eight additional funds that each account for over $10M in foreign currency transactions every year. Unlike the manual approach used in the original study, this study uses the Autobox (Automated Box-Jenkins) application to forecast fund expenditures, while GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models are built to forecast the time-varying volatilities of foreign currency returns. These diverse methodologies are then combined into an overall departmental Value-at- Risk model to determine the maximum expected loss from adverse exchange rate fluctuations over the budget year.

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Keywords
Strategic Finance;ARIMA;AUTOBOX;Autocorrelation Function;Autoregressive;FHS;Filtered Historical Simulation;Foreign Exchange Exposure;FOREX;GARCH;Generalized Autoregressive Conditional Heteroskedasticity;Maximum Likelihood Estimation;MLE;Moving Average;Quantile-Quantile Plots;Time Series;Value at Risk;VaR;Box-Jenkins
Report Number
DRDC-CORA-TM-2009-004 — Technical Memorandum
Date of publication
01 Feb 2009
Number of Pages
126
DSTKIM No
CA032379
CANDIS No
531530
Format(s):
Electronic Document(PDF)

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