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