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s.d p = 3.15%
VaR p, 95%, 1 month = ((4.15%*0.5)+(0.56%*0.5)) - 1.65 * 3.15% = - 2.84%
36.2 36.4 36.6 36.8 37 37.2 37.4 37.6 37.8
If the spot rate is 0.73, the maximum one-day loss of – 1.815% implies a dollar value of:
0.73 * (1 + (- 0.01815)) = 0.71675. 1 USD = 0.71675 EUR
If the maximum one-day loss occurs, the dollar value will decline to 0.71675.
If the firm expects 400,000 USD, it represents a value of 292,000 Euros (400,000 * 0.73) at the
spot rate.
There is only 5% chance that we shall lose more than 5,299.8 Euros.
We are sure with a 95% confidence level that we shall not lose more than 5,299.8 Euros in one day.
Example: A French exporting firm expects to receive substantial payments denominated in Russian Rouble and Peruvian Nuevo Sol in 1 month.
Based on today’s spot rate, the euro value of the funds to be received is estimated at EUR 360,000 for the Rouble, and EUR 120,000 for the
Nuevo Sol. This company wants to determine the maximum expected 1-month loss due to a potential decline in the value of these currencies,
based on a 95% confidence level. Based on the data for the last 24 months, it estimates the standard deviation of monthly percentage changes
to be 6% for the Rouble and 14% for the Nuevo Sol and a negative correlation coefficient of (0.20) between Rouble and Nuevo Sol. Assuming the
monthly percentage changes of each currency and of the portfolio are normally distributed and an expected percentage change of 0% for each
currency during the next month, what is the maximum expected 1-month loss?
The maximum one-month loss is equal to : 480,000 * 8.448% = 40,550.4 EUR
We are sure with a 95% confidence that we will not lose more than 40,550.4 EUR in one month.