Question 21 (8 points) Haines Co. expects to receive 2.5 million euros tomorrow

Question

Question 21 (8 points) Haines Co. expects to receive 2.5 million euros tomorrow as a result of selling goods to Belgium, the current spot price of is $1.08/euro. Haines 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. Using the value-at-risk (VaR) method based on a 95% confidence level, what is the maximum one-day loss (in dollars) if the expected percentage change of the euro tomorrow is 05967 Hint: Use 1.65 standard deviations for 95% confidence interval. -$31,050 -$36,750 -$60,000 $6,325 -$75,000 Save

Explanation / Answer

Expected loss=

Expected change tommorrow + Z transform for CI X Std deviation/Sqrt(no fo days)

=1%+1.65* 0.5%/Sqare root(100)

=1%+1.65%/20= 1%+0.0825%= 1.0825%

EUR/USD= 1.08

Loss expected tommorrow= 2.5 million*1.08*0.665%= $29227 which is close to the first option USD31,050

Thus the answer is 31,050

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