• March 31st, 2016

The selling prices are fixed and in local currencies at the exchange rate prevailing at the time of the delivery

Paper, Order, or Assignment Requirements

1) For the exchange rate of EUR/USD, where estimates are not available, create an estimate by

using the daily closing values of the exchange rate from the last 24 months. Argue which

period might be most relevant, if you decide to use less than the full 24-month period to

create your estimate. Assume that the exchange rate is normally distributed, calculate the

mean and the standard deviation, and use these to fill in the values for France in the table

of orders.

2) Specify the distribution and report the mean and the standard deviation of total revenue in

$.

3) a) What is the probability that this revenue will exceed $ 2,280,000?

  1. b) What is the probability that this revenue will be less than $ 2,160,000?

4) HSBC offers to pay a certain sum of $2,150,000, in return for the uncertain revenue in local

currencies. Give an opinion as to whether this is a good offer for USASuperCars or not?

5) In USASuperCars, the Sales manager is willing to accept HSBC’s offer, but the CEO is not.

Who is more risk-averse?

6) What other risks is the bank taking, apart from the uncertainty in the exchange rates?

7) If the offer is to pay the certain sum next week rather than on 01-06-2016, would that make

any difference? When would the bank and when the company would prefer the payment to

be made, and why?

8) USASuperCars has accepted HSBC’s offer. Assuming the bank will convert all currencies into

US dollars at the prevailing exchange rates. What is the probability that the bank will incur a

loss?

9) The bank defines its Value-at-Risk as the loss that occurs at the 5th percentile of the

uncertain revenue (5% left tail of the distribution). What is the bank’s Value-at-Risk and

what is the bank’s expected profit?

10) What other options does the bank has if they decide not to convert all/some of the

currencies in 01-06-2016?

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