You use today’s spot rate of the Brazilian real to forecast the spot rate of the

Question

You use today’s spot rate of the Brazilian real to forecast the spot rate of the real for one month ahead. Today’s spot rate is $.4558. Use the value-at-risk method to determine the maximum percentage loss of the Brazilian real over the next month based on a 95 percent confidence level. Use the spot exchange rates at the end of each of the last 6 months as shown below to conduct your analysis. Forecast the exchange rate that would exist under these conditions.

Explanation / Answer

The standard deviation of the real value of last six months = 4.09%.

The maximum expected loss in the currency’s value = 1.65 × 4.09% = 6.75%.

If this loss occurs, the exchange rate of the real in one month = $0.4558 × (1 – .0675) = $0.4250.

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