Abstract:
This paper discusses the impact of the recent devaluation of Yuan and its impact on
Emerging Markets. One of the most commonly used method to correct balance of payments
is devaluation of the currency. In case of China, we have deteriorating exports and adverse
balance of payments as one of the reasons for devaluation. Besides, being a protective move,
devaluation also casts shadow on varsity of obligations of member nations of International
Monetary Fund and does not augur well for International trade. Third issue, is the investor's
interest. Investors have taken lot of out of the money positions in the currency markets. They
are running the risk of irrational risk maximization by taking reverse positions in US Dollar
vis a vis Chinese Yuan. Moreover, they will definitely lose lot of money as premium amount.
To add to further apprehension, the model adopted by the Chinese Central Market for the
determination of the currency portfolio is primitive mean - covariance model. This model
does not provide for the statistical errors of estimation and higher moments in the currency
markets. This paper discusses the Value at Risk and Covariance Value at Risk model for
designing optimal portfolio strategy for the fund managers. In this paper we have secondary
method of data collection. We have taken historical data on currency moments for past 60
days. In this paper we have done a comparative analysis using simple covariance vis a vis
Value At Risk and Covariance Value at risk Model. We have used statistical estimated mean
and estimated covariance calculated from the sample data for past 60 days, to show the
superiority of covariance at risk and Value at Risk Model. Optimal portfolio designing
definitely impacts the monetary policies and balance payments of any Central Bank. Value At
Risk and Covariance Value at Risk Model is a better technique for maximizing wealth of
investors in this volatile environment.
