Volatility risk
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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