Volatility Risk
Volatility risk
in
financial markets
is the
likelihood
of
fluctuations
in the
exchange rate
of
currencies
. Therefore, it is a
probability measure
of the threat that an
exchange rate
movement poses to an
investor
's
portfolio
in a foreign currency. The
volatility
of the exchange rate is measured as
standard deviation
over a dataset of exchange rate movements. A far more sophisticated extension of this model is the
Value at Risk
method, which helps to determine the actual risk exposure to a portfolio of several currencies.
Consequences of currency volatility
Reduces volume of
international trade
Reduces
long term
capital flows
Increases
speculation
Increases resources absorbed in
risk management
Economic policy
making becomes difficult
See also
Exchange rate
Standard deviation
Risk management
Value at Risk
method
Market risk
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