58 6) Ovaltine Co.. expects to pay 200,000 in one month for its imports from Por

Question

58 6) Ovaltine Co.. expects to pay 200,000 in one month for its imports from Portugal It also expects to receive 250,000 for its exports to Italy in one month. Ovaltine 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 59 60 61 62 63 64 65 a) What is the net exposure in euros? Imports from Spain Exports to Italy Net Exposure b) Using the value-at-risk (VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is -2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23. 68 spot price Expected change in euro One mth standard deviation std deviations for 95% Max one month loss USD/euro 69 70 71 72 73 742 75 one month change expected change (1.65*std deviation) Max one month dollar loss

Explanation / Answer

a) What is the net exposure in euros Imports from Spain 200000 Exports to Italy 250000 Net exposure -50000 Euros b) Using the value at risk method based on the 95 percent confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is -2 percent? Assume that the current spot rate of the euro(before considering the maximum one-month loss) is $1.23 Spot Price Expected Change in Euro -2 One month standard deviation 3 Standard deviations for 95% 1.65 Max one month loss -6.95 Expected change in Euro -(standard deviation*1.65) Max one month dollar loss 4274.24 Dollar to be receive in current price 50000*1.23 61500 Dollar to be receive now 50000*1.144515 57225.75 4274.25 1.23*6.95% 0.085485 1.23-0.085485 1.144515

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