Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. 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-month loss in dollars if the expected percentage change of the euro during next month is -2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.
A) -$38,468
B) -$21,371
C) -$17,097
D) -$4,274

Question

Quizplus · Accepted Answer

SOLUTION:
Net exposure $= € 250,000 - € 200,000 = € 50,000$
Maximum one-month loss: $- 2 \% - ( 1.65 \times 3 \% ) = - 6.95 \%$
$$\$ 1.23 \times ( - .0695 \% ) \times € 50,000 = - \$ 4,274$$

Treck Co Expects to Pay €200,000 in One Month for Its