How Norway’s SWF deals with FX tail risk

From a risk management perspective, tail risks and return distribution asymmetries of investments are important to analyse. Norges Bank Investment Management (NBIM) in this note describes a modelling approach that addresses some of the weaknesses of standard risk models.

It uses the model internally as a complement to standard models to evaluate tail risk in foreign-exchange (FX) positions. Examples of tail events for FX positions could be single-currency devaluations or more widespread flight-to-quality/carry-trade-unwind episodes.

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Modelling the implied tail risk of foreign exchange positions