Foreign‐exchange trading risk management with value at risk: Case analysis of the Moroccan market

Abstract

Purpose

The aim of this paper is to fill a gap in the foreign‐exchange trading risk‐management literature and particularly from the perspective of emerging and illiquid markets, such as in the context of the Moroccan foreign‐exchange market.

Design/methodology/approach

This paper, demonstrates a constructive approach, for the management of trading risk exposure of foreign‐exchange securities, which takes into account proper adjustments for the illiquidity of both long and short trading positions. The approach is based on the renowned concept of value at risk (VaR) along with the innovation of a software tool utilizing matrix‐algebra and other optimization techniques.

Findings

Several case studies, on the Moroccan Dirham, were achieved with the objective of setting‐up a practical framework of trading risk measurement, management and control reports, in addition to the inception of a practical procedure for the calculation of optimum VaR limits structure.

Practical implications

In this work, the risk‐management procedures that are discussed will aid financial markets' participants, regulators and policymakers, operating within emerging economies, in founding sound and proactive policies to handle foreign‐exchange trading risk exposures. The document includes comprehensive theory, analyses sections, conclusions and recommendations, and full real‐world foreign‐exchange trading risk‐management reports.

Originality/value

Although a substantial literature has examined the statistical and economic meaning of VaR models, this article provides real‐world techniques and optimum asset allocation strategies that are useful for trading portfolios in emerging and illiquid financial markets. This is with the objective of setting‐up the basis of a proactive methodology/procedure for the measurement, management and control of foreign‐exchange exposures in the day‐to‐day trading operations.

Citation

Al Janabi, M.A.M. (2006), "Foreign‐exchange trading risk management with value at risk: Case analysis of the Moroccan market", Journal of Risk Finance, Vol. 7 No. 3, pp. 273-291. https://doi.org/10.1108/15265940610664951