Designing a Risk Assessment Model and determining an Optimal Currency Portfolio for banks by Value-at-risk (VaR) criterion and exponentially weighted moving average (EWMA)

Banks as fund intermediaries in providing and allocating resources to the community, encounter market risk, liquidity risk and etc. In this study, the market risk, is taken into consideration in order to determine the optimal currency basket, one of the fundamental aspects of Foreign Currency Reserve Management in banks, which itself is also affected by fluctuating interest rates, exchange rates, stock prices and etc. The approach used in this paper is the value-at-risk criterion (VaR) the variance-covariance method, along with the exponentially weighted moving average (EWMA) technic. Value at risk actually summarizes the types of risks in a single digit, and it releases the senior management from bunches of risk calculations. The purpose is to design a model which provide an optimal combination for holding 6 currency reserves such as U.S. dollar, Dirham, Yen, Lira, Won, and Euro in Bank Mellat using the reference rates data of the aforementioned currencies in 2018. At the end, the model was solved using LINGO and Excel software. The results show that the maximum share of the US dollar and the dirhams in the currency basket of Bank Mellat are 33% and 67%, respectively. Accordingly, if the share of that currencies mentioned above exceed the obtained digits in the currency basket, then the maximum expected losses on the currency portfolio increase over the time and at the level of desired level of confidence. Also, other currencies are so risky, therefore Mellat Bank, to hold these currencies must plan more based on its trading needs.