Treck Co. expects to pay €200,000 in one month for its imports from Greece. It a
ID: 2710938 • Letter: T
Question
Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.25.
Explanation / Answer
Total net euros to recieve in 1 month=€250,000-€200,000=€50,000
The worst that current spot rate of the euro can move to
=1.25+(2%-3%*1.645)*1.25
=1.25+(.02-.03*1.645)*1.25
=1.2133125 $/€
Thus maximum one-month loss in dollars
=$(1.2133125 -1.25)*50,000
=-$1834.375
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