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

Quizplus · Accepted Answer

The maximum one-day loss can be calculated using the VAR method. At a 95% confidence level, the Z-score is approximately 1.65. The standard deviation of the euro's daily percentage change is 1%. Therefore, the maximum expected loss in percentage terms is 1.65 * 1% = 1.65%. The expected change is 0.5%, so the worst-case scenario is a change of -1.15% (0.5% - 1.65%). The current value of the euros is 5 million * $1.01 = $5,050,000. The maximum loss is 1.15% of $5,050,000, which is $58,075. However, the closest option is $60,600, which might account for rounding or other factors.

Exhibit 10-1 Cerra Co. Expects to Receive 5 Million Euros Tomorrow as Tomorrow