Methodological approaches to currency risks at the macro level

Abstract

A comprehensive investigation of the exchange rate as one of the critical indicators of macroeconomics has remained relevant since the introduction of the Jamaican monetary system. Moreover, the topic is even more important for small open economies and their financial sustainability. Logically, currency risks are of similar importance. However, their analysis, assessment, and management are complicated tasks. The reason is the dual nature of the exchange rate since it can generate autonomous shocks and act as an independent factor on other economic categories, such as inflation, interest rate, balance of payments, or export earnings. On the contrary, it can be a function of the same indicators but indirectly or with a time lag. Thus, an error or deviation from the direct object of study at any risk management stage - identification, analysis, evaluation, or management - can cause the actor's financial or economic losses. In particular, a study of the inflationary currency risk requires instruments of fundamental analysis for its assessment. In contrast, it is possible to use both fundamental and technical analysis tools for the exchange rate risk, depending on the objective. As a result, it is necessary to find a careful step-by-step consideration, or in other words, a way of organizing the study of currency risks. In this article, we have proposed a way based on the integration of the approach of Easterby-Smith et al. (2018) and the conceptual modeling of Guizzardi (2005). According to the proposed logic and structure, the correctness of choosing the appropriate way of quantifying risks depending on the preliminary theoretical analysis is demonstrated. The approach is suitable for the study of other economic phenomena or processes.