A U. S based MNC, the Bundy Company, will receive one million yen tomorrow for i

Question

A U. S based MNC, the Bundy Company, will receive one million yen tomorrow for its exports to an importer in Japan. It wants to determine its maximum one day loss based on a 95% confidence interval. The firm's estimate of the standard deviation of the daily percentage change in the yen during the previous 100 days is 1.1%. Given that the spot rate for the Yen is $0.012, find The value of the yen based on the maximum one day loss if the firm expects a 0.5% fall in its value. The potential dollar loss for the Bundy co. if the percentage variability in the daily movements of the yen is 1.3% The potential dollar loss if the confidence intervals is 90% and the percentage variability of the yen is unchanged at 1.1%

Explanation / Answer

a) 0.5% - (1.65 * 1.1%) = 0.005 - 0.018 = -0.013 = -1.3%

Maximum one day loss = 1,000,000 * 0.012 * -1.3% = $156

b) If daily movement is 1.3% then,

0.5% - (1.65 * 1.3%) = 0.005 -0.021 = -0.016 = -1.6%

Maximum one day loss = 1,000,000 * 0.012 * -1.6% = $192

c) if confidence level is 90%, then

0.5% - (1.56 * 1.1%) = 0.005 - 0.017 = -0.012 = -1.2%

Maximum one day loss = 1,000,000 * 0.012 * -1.2% = $144

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