My goal is to develop a model to simulate long term FX movements. (I am not sure if long term makes any difference, but if it does I am more interested in long term fx movements)
These Monte Carlo simulations will not be used for pricing but from a risk-management perspective, to calculate how much the portfolio is exposed to FX risk.
I was wondering if there is a suggested model (or paper or anything) that I could use as a starting base.
Some further notes, after Matt's comment:
I am not interested in some sort of a trading strategy (i think i misused the words: portfolio and exposure). And i don't want to hedge or price anything.
Imagine that you have lend some money (through some instrument) that you will receive in 20-30 years in a foreign currency. Now you believe that forex rates have some correlation with your instrument and some other factors and you want to see how much you stand to lose in a worst case scenario.
My idea was that I would run an MC where i will have some sort of forex evolution correlated with the evolution of my instrument and i set up some sort of a stress test.
Is my line of thinking correct, or you believe that i should be trying something else?
If we agree that my approach is decent, my question is how would you evolve a forex rate.