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I have a Forex trading account with a base currency USD. I am holding a position in EUR/JPY and would like to estimate my daily VaR. If I compute the EUR/JPY returns using the historic prices this would not be the right way of doing it, since it would give me returns in JPY which need to be further converted to USD.

What is the correct way for me to compute the VaR and the underlying returns?

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  1. Apply your trading strategy to history.
  2. Convert account equity to USD by applying historical USD/JPY rates.
  3. Calculate VAR/returns as usual.

Remember, VAR calculated in such a way will underestimate the impact of extreme events: i.e. 95% VAR will return you minimum of what you can lose on 5% trading days.

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