Currency Risk Management Based on the Concept of Value-at-Risk (VaR): An Application to Non-Financial Companies

Abstract

Over the past five years, Brazil experienced a long period of its own currency appreciation against the U.S. dollar, who made the non-financial companies started to use derivatives in a way to manage their currency exposures, either as a mechanism to hedge or leverage. Such transactions are occurring without any establishment of a formal policy to the derivative transactions, where the establishment of a limit on the maximum risk exposure could be a powerful instrument of corporate governance. Thus, this study aimed to establish a proposal to manage exchange risk from the use of Value at Risk-VaR, specific to derivative transactions in non-financial companies. The model was applied in a series of daily returns in reais versus U.S. dollar (PTAX) consisting of 1.132 observations, which included the period from 29/03/2004 to 30/09/2008. After that, the estimation of the volatility was predicted from the EGARCH (Exponential Autoregressive Conditional heteroskedastic General). The estimation of VaR was performed in a loan portfolio swap from one non-financial company located in Rio Grande do Sul, which had exporting activities and is registrated as a publicly traded company in the stock exchange. The foreign exchange generated by the VaR model EGARCH was tested by Monte Carlo simulation, which demonstrated a high degree of adherence of the model.