Question

X Co. will receive 6 million British Pound tomorrow. The standard deviation of daily percentage changes of the BP is 1.5 percent. Using value-at-risk (VAR) method with a 95% confidence level what is the maximum one-day loss. Assume that the expected percentage change of the Pound tomorrow is 0.6%?

a.	-0.5%
b.	-2.2%
c.	-1.5%
d.	None of the above

Refer to last question. What is the maximum one-day loss in dollars? Expected % change of the Pound tomorrow is 0.5%? The spot rate of the BP is $1.01.

a.	-$75,750.
b.	-$60,685.
c.	-$119,685.
d.	-$25,255.

Answer 1

Given that,

X co. will receive BP 6000000 tomorrow.

standard deviation of daily percentage changes of the BP sd = 1.5%

expected percentage change of the Pound tomorrow u = 0.6%

at 95% confidence level, value of Z is 1.65

So, VAR at 95% level is u - Z*sd = 0.6 - 1.65*1.5 = -1.875%

So, none of the option is correct.

When expected percentage change of the Pound tomorrow u = 0.6%

VAR = 0.5 - 1.65*1.5 = -1.975%

So, single day loss = VAR*Exchange rate*amount = -1.975*1.01*6000000 = -$119685

Option c is correct.