Comparison of GARCH Model and Monte Carlo Simulation for Estimating the Value at Risk of Foreign Exchange Portfolio

One of the key concepts in risk managing of financial portfolios is the probability based risk measurement method known as value at risk. During recent years, various methods have been introduced by researchers to compute this criterion. Because of their dissimilar assumptions and procedures, making the use of each of which creates different results. Therefore, this paper uses two main methods in order to measure the value at risk of foreign exchange portfolio. They comprise generalized autoregressive conditional heteroskedasticity model and Monte Carlo Simulation. Using failure rate back testing, the results of these methods are compared. The results of the evaluation demonstrate that the mentioned methods have different performances.