Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last 50 months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.

-Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.
A) -9 percent
B) -30 percent
C) -5 percent
D) None of these are correct.

Question

Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last 50 months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.
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-Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.
A) -9 percent
B) -30 percent
C) -5 percent
D) None of these are correct.

Quizplus · Accepted Answer

The maximum one-month loss at a 95% confidence level can be calculated using the Value at Risk (VaR) formula for a portfolio of two assets. The VaR is given by: VaR = Z * √(w1^2 * σ1^2 + w2^2 * σ2^2 + 2 * w1 * w2 * σ1 * σ2 * ρ), where Z is the Z-score for 95% confidence (1.65), w1 and w2 are the weights of the euro and Canadian dollar in the portfolio, σ1 and σ2 are their standard deviations, and ρ is the correlation coefficient. Calculating this gives approximately 9 percent.

Exhibit 10-2 Volusia, Inc. Is a U.S.-Based Exporting Firm That Expects to Expects