RiskEye - VaR Quality

VaR Measurement Quality for Optimised Forex Portfolio

The graph shows the ratio of the realised VaR exceedence count against the theoreticaly expected exceedence count against the confidence level. The region above unity represent under-estimation of risk. The region below unity represents over-estimation of risk. The data represents 391 business days from 1.1.1999 to 30.06.2000. The portfolio used for each day is constructed as an optimzed positions over 9 major currencies against the USD. The optimisation is with respect to a biased simulation based on forward rate scenarios for the price evolution of the forex spot rates. The VaR computed with the biased simulation is clearly seen to be less conservative then the VaR computed with the unbiased simulation - which does not assume a forward rate drift for the forex price evolution.