Suppose that Colorado Co., a U.S. based MNC, seeks to assess its transaction exposure using the value-at-risk (VaR) method over the next quarter. It is primarily concerned about its exposure in euros, as it has determined that the remainder of its portfolio is such that the effects of currency fluctuations typically offset. Suppose that, based on historical data, it has determined that the expected change in the value of the euro is -2.00% over the next quarter and that the standard deviation of these changes is 2.00%. Colorado assumes that these changes are normally distributed, such that the maximum quarterly loss lies within 1.65 standard deviations below the expected change with 95% confidence. Under this scenario, the maximum one-quarter loss due to transaction exposure is approximately with 95% confidence. Now suppose that, based on updated data, the standard deviation of changes in the euro is actually 5.00%. All else remains unchanged. Under this scenario the maximum one-quarter loss due to transaction exposure is ap smaller larger with 95% confidence. Based on these results, the larger standard deviation of the change in the euro, the the maximum loss will be.

Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts that the spot rate is likely to be $1.10 per euro in six months. Required: a. What is the expected gain/loss from a forward hedge? Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging? a. b. Would you recommend hedging this euro…

Suppose that in 2020, the rate of inflation in Denmark was 0.6%, and the rate of inflation in the Euro area was 2.2%. If the Euro depreciated relative to the Danish Krone by 0.75% in the same year, what would be the magnitude of the movement of the real exchange rate (RER) of the Euro relative to the Danish Krone? Euro appreciated in real terms by 2.35 percent. Euro depreciated in real terms by 2.30 percent. Euro appreciated in real terms by 100.83 percent. O d. Euro appreciated in real terms by 0.83 percent. O c.

(Transaction Exposure)Trident — A U.S.-based company, has concluded a sale of telecommunications equipment to Regency (U.K.). A total payment of £2,000,000 is due in 90 days.  Given the following exchange rates and interest rates,  the break-even investment rate (for money market hedge) is _________% when comparing the forward hedge and the money market hedge.     Assumptions   Value 90-day A/R in pounds   £2,000,000.00 Spot rate, US$ per pound ($/£)   $1.5610 90-day forward rate, US$ per pound ($/£)   $1.544 3-month U.S. dollar investment rate   14.000% 3-month U.S. dollar borrowing rate   12.000% 3-month UK investment interest rate   7.500% 3-month UK borrowing interest rate   10.000% Put options on the British pound: Strike rates, US$/pound ($/£)          Strike rate ($/£)   $1.55           Put option premium   1.2%      Strike rate ($/£)   $1.54           Put option premium   1.1%      Strike rate ($/£)   $1.55          Call option premium   2.1%…