Internet/Excel Exercises Go to www.oanda.com and obtain the direct exchange rate

Question

Internet/Excel Exercises

Go to www.oanda.com and obtain the direct exchange rate of the Canadian Dollar and the Euro at the beginning of each of the last seven years.

Assume that you received two Million in Canadian Dollars (CAD) in earnings from your Canadian subsidiary at the beginning of each year over the last seven years. Multiply this amount by the direct exchange rate of CAD at the beginning of each year to determine how many U.S. dollars (USD) you received. Determine the percentage change in cash flow dollars received from one year to then next. Determine the standard deviation () of these percentage changes. This measures the volatility of movements in the Dollar earnings resulting from your Canadian business over time.

Now assume that you received one Million Euros at the begging of each year from your German subsidy. Repeat the same process for the Euro to measure the volatility of movements in the dollar cash flows resulting from your German business over time. Are the movements in dollar cash flows more volatile for the Canadian or German business?

Now consider the dollar cash flows you received from the Canadian subsidiary and the German subsidiary combined. That is, add the dollar cash flows received from both businesses each year. Repeat the process to measure the volatility of movements in the dollar cash flows resulting from both businesses over time. Compare the volatility in the dollar cash flows of the portfolio to the volatility in cash flows resulting from the German business. Does it appear that the diversification of businesses across two countries results in more stable cash flows than the business in Germany? Explain.

Explanation / Answer

It appears that canadian business is more volatile to dollar cash flows due to higher standard deviation value. On the other hand, we observe diversification reduces volatility to only 0.38 - the lowest vis-a-vis both cases.

Year CAD/EUR Rate CAD Received CAD/USD Rate US Dollars received % Change in inflows Deviations squared Divide D column value by E column value Use percentage formula Average =2.951 2008 0.641 20,00,000 0.942 2123142.251 2009 0.63 20,00,000 0.88 2272727.273 7.05 16.76 2010 0.732 20,00,000 0.97 2061855.67 -9.28 149.56 2011 0.726 20,00,000 1.01 1980198.02 -3.96 47.77 2012 0.778 20,00,000 1 2000000 1.00 3.81 2013 0.731 20,00,000 0.97 2061855.67 3.09 0.02 2014 0.682 20,00,000 0.905 2209944.751 7.18 17.90 2015 0.705 20,00,000 0.783 2554278.416 15.58 159.52 Sum total 20.66 395.34 Average/Standard Deviation 2.951 56.48

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