Measuring Exchange Rate Risk Of Kenya’s Main Trading Currencies

Abstract

This study measures the exchange rate risk of Kenya’s main trading currencies mainly the United States of America dollar, the Euro and the United Kingdom pound. The Value at Risk model is used to estimate this risk; in particular the parametric approach and the historical approach are used. Data from the central bank of Kenya is used showing the daily closing exchange rate of Kenyan shilling against these three currencies from the period that starts in January 2003 to December 2013 covering 2286 trading days. The exchange rate data is analysed using SPSS and its fluctuations are observed over the period, with each currency exhibiting volatility. The results of the Value at Risk estimates show that at higher confidence levels like 99% the estimate is high compared to lower confidence levels like 90%. The two approaches in estimating Value at Risk show similar results with small differences at each confidence level.