Exhibit 10-1 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. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s).
-Refer to Exhibit 10-1. 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

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SOLUTION:
$\begin{array} { l } 
0.5 \% - ( 1.65 \times 1 \% ) = - 1.2 \% \
\$ 1.01 \times ( - .012 ) \times 5,000,000 = - \$ 60,600
\end{array}$