Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 97.5 percent confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.35.

Question

Quizplus · Accepted Answer

First, we need to calculate the total cash flow in dollars for next month:
- Import payment from France: €50,000 x $1.35/€ = $67,500
- Export receipt from Belgium: €200,000 x $1.35/€ = $270,000
- Net cash flow: $270,000 - $67,500 = $202,500

Next, we need to calculate the standard deviation of the euro's percentage change in dollars:
- Standard deviation = 2.5% x $1.35 = $0.03375

Then, we can use this information to calculate the one-month VaR at a 97.5% confidence level:
- VaR = $202,500 x 2% x 1.645 x $0.03375 = $5,873. Note that we use 2% instead of 0.02 because VaR is calculated in decimal form.

Therefore, the maximum one-month loss in dollars is $5,873. Option C is the correct answer.

Jensen Co Expects to Pay €50,000 in One Month for Its