Foreign exchange risk management in the Peruvian banking system

This article evaluates the implementation of the “Value-at-Risk” (VaR) model in the management of foreign exchange risk within the Peruvian banking system, in a context of high exchange rate volatility due to international financial crises. The main research question focuses on how VaR could moderate exchange rate volatility through a more prudent approach to banks’ portfolio decisions. Daily data on banks’ Hedged Foreign Exchange Position (PCCU) from January 1998 through September 1999 are used, applying methodologies such as the delta-normal approach and historical simulation to calculate VaR. The results indicate that foreign exchange transactions have increased exchange rate volatility, negatively affecting risk management. In addition, it is found that the PCCO has causal effects on exchange rate volatility, while the PCCU does not show the same relationship. These findings suggest that a more active use of VaR could benefit the stability of the banking system, highlighting the need for more appropriate regulation in foreign exchange risk management. (Abstract and audio: Department of Economic Publications)