How do I compute VaR for an FX position when my account base currency is different?

Question

AcadiFi · Accepted Answer

FX VaR should be measured in the reporting currency of the portfolio. If the account base currency is USD, the analyst must convert the position value and P/L into USD under each historical or simulated scenario. Looking only at EUR/JPY returns can miss the effect of USD conversion and can report risk in the wrong unit.

Suppose Redwood FX Risk holds a EUR/JPY position in a USD-denominated account. A scenario changes EUR/JPY and USD/JPY at the same time. The desk should value the position after those moves, translate the result into USD, and then calculate the USD profit or loss. The VaR is read from the distribution of USD losses, not from raw EUR/JPY percentage changes alone.

This is especially important when cross rates are involved. The position may appear to be one currency pair, but the reporting-currency P/L can depend on an additional exchange rate. FRM candidates should always ask: what is the exposure, what is the reporting currency, and what rates are needed to translate scenario values? VaR is only meaningful when the loss unit matches the decision-maker's capital and limits. On the exam, also state the horizon, confidence level, data source, modeling assumption, and validation step, because those choices usually explain why two reasonable VaR answers differ materially. Practice more in our FRM question bank.

How do I compute VaR for an FX position when my account base currency is different?

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