NBIM Discussion Note on the Implied Tail Risk of Foreign-Exchange Positions
22 November 2012
From a risk management perspective, tail risks and return distribution asymmetries of investments are important to analyse. Norges Bank Investment Management (NBIM) in this note describes a modelling approach that addresses some of the weaknesses of standard risk models.
We use the model internally as a complement to standard models to evaluate tail risk in foreign-exchange (FX) positions. Examples of tail events for FX positions could be single-currency devaluations or more widespread flight-to-quality/carry-trade-unwind episodes. Formal tail-risk modelling involves a lot of mathematics, and while we have left out some details, we have kept relevant technicalities to motivate the approach we have chosen.
Read discussion note 15 on the implied tail risk of foreign-exchange positions
More information and previously published discussion notes