Assessing Exchange Rate Risk: risk measures, applications in international development institutions

This thesis was written during my internship at the Agence Française de Développement. It aims to provide an overview of the institution and of the work carried out within the Risk Executive Directorate (DXR). After this introduction, the company, the business model and the work carried out will be presented. The tasks performed on the investment limits in local currency will play a pivotal role in the content of this thesis, as a bridge between the internship and academic studies. In this context, a case study will be presented to illustrate how the choice of a risk measure can influence an institution’s risk assessment and decision making process. The case study will examine the model currently used to compute investment limits in local currencies, highlighting how it could be made more statistically robust against adverse market conditions. Since potential losses arising from local currency exposures could undermine the institution's capacity to fulfill its development mandate, implementing a proper risk measure is a crucial strategic tool that provides management with the insights needed for prudent decision-making. This leads to the following research question: “What are the best practices in exchange rate risk measurement, and to what extent are they suitable for managing the risks of AFD’s local currency exposures?” The third part, which constitutes the core of this thesis, will be dedicated to answering this question. The literature review will investigate the main risk measures, used in the financial industry, to measure exchange rate risk. Building on this review, the study aims to assess which approaches are the most suitable in the specific context of AFD’s activities. This internship concludes my double degree in “Quantitative Finance and Risk Management” and “Économie et Finance”, jointly delivered by “Ca’ Foscari University of Venice” and “Université Paris - Dauphine”. In this respect, beyond the technical aspects, the conclusion of this work also offers personal reflections on the internship experience and its implications for my academic and professional orientation.