Cerra Co.expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands.Cerra 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 0.5% The current spot rate of the euro (before considering the maximum one-day loss)is $1.01.

Question

Quizplus · Accepted Answer

First, we convert the 5 million euros to dollars using the current spot rate:
5,000,000 euros * $1.01/euro = $5,050,000

Next, we calculate the maximum one-day loss at a 95% confidence level using the VAR method:
VAR = expected percentage change * standard deviation * portfolio value
where portfolio value is the amount of euros that will be converted to dollars tomorrow.

Expected percentage change = 0.5%
Standard deviation = 1%
Portfolio value = 5,000,000 euros = $5,050,000

VAR = 0.5% * 1% * $5,050,000 = $25,250

Finally, we subtract the VAR from the portfolio value to get the maximum one-day loss:
$5,050,000 - $25,250 = $5,024,750

Therefore, the maximum one-day loss in dollars is -$60,600 (Choice B).

Cerra CoExpects to Receive 5 Million Euros Tomorrow as a Result