Question

Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 5 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.25. Please find the overall exchange risk of the company.

Answer 1

Given data follows below:

Funds to be received is estimated at =$500,000. euros

Funds to be received is estimated at = $300,000  Canadian dollars

Monthly percentage changes to be= 8 percent

percent for the Canadian dollar = 5 percent

correlation coefficient between the euro and the Canadian dollar is 0.25

Calculating overall exchange risk of the company.

=sqrt((5/8*8%)^2+(3/8*5%)^2+2*5/8*8%*3/8*5%*0.25)

=0.057662215286

=5.76622%

5.76622%  overall exchange risk of the company.

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