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I am doing a research for stress testing in market risk. The usual process I found out for scenario testing is:

  1. Define risk factors upon the portfolio
  2. Define the desired scenarios
  3. Vary the risk factors and execute the different scenarios
  4. Interprete the scenarios

My problem is that I do not know how to define the risk factors for a portfolio? Which R functionality could I use? For example, what are the risk factors for a simple FX portfolio when I consider the portfolio: EURUSD, USDMXN, AUDUSD, USDJPY and USDKRW?

I really appreciate your answer!

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I voted to close this as it asks for interpretation of scenarios - something open-ended and subjective, all of which, with agreement from @Quantlbex, validates removal. –  kristine Jul 19 '13 at 5:19
@kristine What did Quantlbex write on here? –  chrisaycock Jul 19 '13 at 16:21
@chrisaycock I haven't written here yet. I guess kristine is refering to (part of) the justification I gave to close one of her questions which was about conferences and networking events. –  QuantIbex Jul 19 '13 at 16:42
@kristine In my opinion, you misunderstood the question as it does NOT ask for interpretation of scenarios. It asks for the methodology to define risk factors, an implementation of it in R, and the risk factors for a specific portfolio all of which are not subjective nor open-ended. As such, I don't think the question should be closed. –  QuantIbex Jul 19 '13 at 16:43
@QuantIbex Thanks for the clarification. That conference question was totally off-topic, whereas this question about risk factors looks totally fine. I think kristine is just upset about something since she voted to close a bunch of questions all at once. –  chrisaycock Jul 19 '13 at 16:46
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