Question

(3)Bundy co. based in the U.S will receive one million yen tomorrow for its exports to an importer in Japan. It wants to determine its maximum one day loss (due to potential decline in the value of the yen) based on a 95% confidence interval. The firm estimated the standard deviation of the daily percentage change in the yen during the previous 100 days and the result was 1.1%. If the firm expects the percentage change in the yen to fall by 0.5%, find (a) The value of the yen based on the maximum one day loss given that the spot rate is $0.012 (b) The potential dollar loss for the Bundy co. (c) The changes (if any) in your answers to part (a) and part (b) of this question the confidence interval is 90%.( instead of the original 95%) (d) The dollar loss if the confidence interval is 90% and the percentage variability of the yen is 1.4%

Answer 1

For 95% confidence interval ,Z value is 1.96

Standard deviation = 1.1%

(a) Maximum one day loss at 95% confidence interval

Value at risk = Z at 95% confidence interval * standard deviation

= 1.96 * 1.1%

= 2.156%

Current Yen/Dollar spot rate =$0.012

  Value of Yen based on 2.156% loss = (1- max one day loss) * spot rate

= (1-2.156%) * 0.012

= $0.01174

(b) Potential dollar loss = 1,000,000 * exchange rate for maximum loss - 1,000,000 * original yen/dollar exchange rate

= 1,000,000 * 0.01174 -1,000,000 * 0.012

Potential dollar loss = -$259

(c) If confidence interval is 90% then Z= 1.64

Max. potential loss = 1.64 *1.1% = 1.80%

Value of Yen = (1-1.8%) *0.012 = 0.01178

Potential dollar loss = 1,000,000 * 0.01178 -1,000,000 * 0.012

Potential dollar loss = -$216

(d) If standard deviation = 1.4% and confidence interval = 90% then Z=1.64

Max. potential loss = 1.64 *1.4% = 2.23%

Value of Yen = (1 - 2.23%) *0.012 = 0.01172

Potential dollar loss = 1,000,000 * 0.01172 -1,000,000 * 0.012

Potential dollar loss = -$276