1. Fernando Co. will receive 5 million British pounds (£) tomorrow as a result of selling products to a British firm. Fernando has estimated the standard deviation of daily percentage changes of the British pound to be 1.1 percent over the last 100 days. Assume that these daily percentage changes are normally distributed. The expected daily percentage change for the British pound is 0.2 percent tomorrow.
What is the maximum one-day loss based on the value-at-risk (VAR) method? Assume a 95% confidence interval.
a. 2.02 percent
b. 1.82 percent
c. 1.62 percent
d. 1.10 percent
e. None of these choices are correct.
2. Fernando Co. will receive 5 million British pounds (£) tomorrow as a result of selling products to a British firm. Fernando has estimated the standard deviation of daily percentage changes of the British pound to be 1.1 percent over the last 100 days. Assume that these daily percentage changes are normally distributed. The expected daily percentage change for the British pound is 0.2 percent tomorrow.
What is the dollar value of the maximum potential loss Fernando Co. could incur if the current spot rate for the pound is $1.50?
a. $75,000
b. $136,500
c. $151,500
d. $121,500
e. None of these choices are correct.