Measuring the exchange rate risk by Value at Risk (VAR) method and use of the financial derivative instruments against this risk: A sample application

In this thesis, studies have been made on the methods that can be applied by the firms facing with foreign exchange position deficit as a result of the foreign trade transactions and these methods focus on measuring exchange risk and how to manage it more effectively. In practice, a hypothetical year-end balance sheet of a sample company was formed and it was assumed that the company has foreign exchange position deficit regarding the currencies of US dollar, euro, pound and Swiss frank. The firm has tried to hedge itself against the possible foreign exchange risk by using derivative instruments. The theoretical pricing of the derivative contracts was calculated by using Microsoft Excel 2016 program. Then, it was supposed a portfolio was created for all these currency types to be entered in the long position. Also, closing prices for every currency unit in the portfolio including 253 business days were taken from the CBRT site and the methods of calculating Value-at-Risk (VaR) were applied by calculating logarithmic return changes. In order to use Variance-Covariance Method, Historical Simulation Method and Monte Carlo Simulation Method, which are all among the methods of calculating VaR, three different results are achieved by making three different calculations for lock-up period of 180 days with %99 assurance. After that, all the results are compared and interpreted. In conclusion, it is seen that using derivative instruments against exchange risk has a positive effect on the firm's financial position. In addition to that, risk management process and liquidity structure are to be emphasized calculating how much the company may lose as part of its position thanks to measuring exchange risk.