Examination of portfolio currency risk estimation by means of Lévy models

Financial risk modeling, measuring, and managing are an inherent part of management in financial institutions. It is also an important step within the setting of optimal level of capital eligible to cover risk exposures. A significant portion of capital is usually assigned to cover the risk of unexpected changes in FX rates. FX rates (the returns) commonly exhibit significant skewness and relatively huge kurtosis. In this paper, we apply subordinated Lévy models coupled together by ordinary elliptical copula functions in order to estimate the FX rate risk of normalized portfolio. Selected models are applied in order to estimate the risk ex-post, as well as ex-ante. The models are also compared to the more standard assumption of the joint normal distribution. Although the results for both types of modeling are quite different and Lévy measure is ignored, suggested models deliver us improved risk estimation