Copula-Models in Foreign Exchange Risk-Management of a Bank

Henry Penikas

Applied Econometrics, 2010, vol. 17, issue 1, 62-87

Abstract: The paper deals with the optimization problem aiming to maximize the expected return given the amount of the bank’s open currency positions subject to the level of foreign exchange risk. The goal of the paper is to compare the efficiency of problem-solving assuming either multivariate normality, or using copulas to semi-parametrically simulate the empirical joint distribution. Back-testing is used both to support the choice of a proper copula‑model and to compare the different optimization approaches efficiency. Based on the research results it is shown that copula‑models should be preferred as enabling to receive higher yield given the same level of foreign exchange risk

Keywords: Copulas; foreign exchange risk; open currency position (OCP); optimization (search for similar items in EconPapers)
JEL-codes: D81 G32 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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