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Constructing a Minimum Risk Currency for the BRICS Countries

Student: Krymin Tigriy

Supervisor: Kirill Romanyuk

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Economics (Bachelor)

Year of Graduation: 2021

BRICS is a group of five developing countries with the prospect of outperforming the G7 countries in terms of total GDP. In the context of the possible collapse of the world economic system into macroregions, the issue of forming aggregated currencies like the Euro is relevant. The purpose of this work is to build a currency portfolio of minimal risk for the BRICS countries. It should be much more stable than the regular currencies included in it, and reduce the currency risks when investing in these countries. In this paper, we discuss the theory of building Markowitz currency portfolios and perform the necessary calculations to build a currency with minimal risk. The data is a time series of the exchange rates of five currencies: the Brazilian real, the Russian ruble, the Indian rupee, the Chinese yuan and the South African rand. The time period is from January 2011 to March 2021, since the coronacrisis began in March 2020, the consequences of which are interesting to assess. The time series presents data on the rates for each day of trading in the amount of approximately 17 thousand observations. Exchange rates are taken from the international portal investing.com. As a result, I was able to build an aggregated currency that is much less volatile than the currencies it consists of, and also less volatile than the weighted average portfolio. The aggregated currency is 10 times less prone to volatility. It should be noted that a multi-currency basket has the advantage of a reduced probability of simultaneous unidirectional changes in the exchange value compared to a bi-currency basket. The results obtained are fully consistent with the phenomenological theory of metamoney Khovanov. Thus, this paper shows the adequacy and prospects of applying the theory of aggregated currencies to determine the structure of the currency basket. The results obtained can be used both by the states parties to the agreement and by private investors investing in the currencies of these countries. The developed macro also allows you to calculate the structure of the currency portfolio of minimal risk for any other set of currencies in the shortest possible time. Keywords: minimum risk portfolio, aggregated currency, currency risks, exchange rate.

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