Internal risk control benchmark setting for foreign exchange exposure: The case of the Moroccan Dirham

Mazin A.M. Al Janabi

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    Purpose - This paper seeks to provide foreign exchange risk measurement/management techniques and strategies that can be applied to investment and trading portfolios in emerging financial markets, such as the Moroccan foreign exchange market, with the objective of setting up the basis of a methodology/procedure for the measurement, management and control of foreign exchange exposures in the day-to-day trading operations. Design/methodology/approach - Demonstrates a proactive approach for the measurements, management and control of market risk exposure for financial trading portfolios that contain foreign exchange securities. This approach is based on the renowned concept of value-at-risk (VAR) along with the creation of a software tool utilizing matrix-algebra technique. In order to illustrate the proper use of VAR and stress-testing methods, real-world examples and practical reports of foreign exchange trading risk management are presented for the Moroccan Dirham. Findings - To this end, several case studies were achieved with the objective of setting up a practical framework of trading risk measurement and control reports in addition to the inception of procedures for the calculation of VAR’s limits. Moreover, the effects of hedging of foreign exchange trading exposures with reciprocal equity trading positions were explored and quantified. Finally, initial empirical tests of the long-term behavior of the Moroccan foreign exchange and debt markets were quantified and analyzed. Practical implications - In this work, key foreign exchange trading risk management methods, rules and procedures that financial entities, regulators and policymakers should consider in setting up their daily foreign exchange trading risk management objectives are examined and adapted to the specific needs of emerging markets, such as in the context of the Moroccan foreign exchange market. Originality/value - This paper fills a gap in the foreign exchange risk management literature especially in the emerging markets perspective. The risk management procedures that are discussed in this work will aid financial markets’ participants, regulators and policymakers in founding sound and up-to-date policies to handle foreign exchange risk exposures.

    Original languageEnglish
    Pages (from-to)84-111
    Number of pages28
    JournalJournal of Financial Regulation and Compliance
    Volume14
    Issue number1
    DOIs
    Publication statusPublished - 2006

    Keywords

    • Emerging markets
    • Financial risk
    • Foreign exchange
    • Morocco
    • Stock exchanges

    ASJC Scopus subject areas

    • Strategy and Management

    Fingerprint

    Dive into the research topics of 'Internal risk control benchmark setting for foreign exchange exposure: The case of the Moroccan Dirham'. Together they form a unique fingerprint.

    Cite this