Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goo

Question

Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s).

   28.   Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?

a.

-0.5%

b.

-2.2%

c.

-1.5%

d.

-1.2%

ANS: D

SOLUTION:

0.5% - (1.65 ´ 1%) = -1.2%

When I calculate this on my calculatorI get .4835. What am I doing wrong?

a.

-0.5%

b.

-2.2%

c.

-1.5%

d.

-1.2%

Explanation / Answer

Answer ) Hi I think you have take 1.65 as 1.65%

Now if we do

0.5% - (1.65%*1%)

= 0.5%- (0.01650%)

=0.4835% (Your answer)

However if we do

0.5%- (1.65*1%)

0.5% - (1.65%) = - 1.15% or 1.2% approx

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