Emphasizing the need for risk mitigation arising out of excess volatility in rupee experienced by India post implementation of the market determined exchange rate regime in 1993, currency futures were introduced in India in 2008, and currency trading has become one of the most important financial operations since then. In this paper, an attempt has been made to measure and compare the market risk prediction ability of historical simulation, Monte-Carlo simulation, Exponentially Weighted Moving Average (EWMA) and linear parametric VaR approaches for Indian currency spot and futures market. Using the data from 2008 to 2013, the VaR associated with the three main currencies in the economy, namely, US dollar, euro and UK pound sterling, is calculated. Conditional and unconditional coverage tests have been applied to backtest the results of various VaR approaches. The results indicate that Monte-Carlo simulation is appropriate in predicting market risk. Further, it is also found that risk seems to be higher in the future market as compared to the underlying markets.

An important structural change was brought in the Indian foreign exchange market when India moved from pegged exchange rate to market determined exchange rate regime in 1993. The demise of the system of fixed exchange rates added to financial risks (Jorion, 2000). Since then India has been experiencing high volatility in rupee. Emphasizing the need for risk mitigation arising out of excess volatility and also to advance Indian foreign exchange market to international standards (Somnath, 2011), currency futures were introduced in India in 2008, and currency trading has become one of the most important financial operations. Currency futures trading in INR-USD started on August 29, 2008. The exchange traded currencies were extended to the INR-Euro, INR-GBP and INR-Yen currency pairs in January, 2010. Derivatives instruments are introduced with the intention of reducing volatility and speculation in the underlying markets. But too much speculation in either of the markets would give rise to market risks. The serious limitation for a statistically significant analysis is the short histories of data of the developing economies (Goran et al., 2010) like India. This paper attempts to measure and compare the market risk prediction ability of historical simulation, Monte-Carlo simulation, Exponentially Weighted Moving Average (EWMA) and linear parametric Value-at-Risk (VaR) approaches in Indian currency spot and futures market.

Financial Risk Management Journal, Monte-Carlo simulation, Exponentially Weighted Moving Average (EWMA) and linear parametric Value-at-Risk (VaR), Exponentially Weighted Moving Average (EWMA), Indian Currency, Market Risk Analysis, Value-at-Risk, INR-Euro, INR-GBP and INR-Yen.