9.11. Bank of Southern Tasmania has determined that its inventory of 20 million euros (EUR) and 25 million British pounds (BP) is subject to market risk. The spot exchange rates are $0.40/EUR and $1.28/BP, respectively. The s's of the spot exchange rates of the EUR and BP, based on the daily changes of spot rates over the past six months, are 65 bp and 45 bp, respectively. Determine the bank's 10- day VAR for both currencies. Use adverse rate changes in the 95 percentile.

9.11. Bank of Southern Tasmania has determined that its inventory of 20 million euros (EUR) and 25 million British pounds (BP) is subject to market risk. The spot exchange rates are $0.40/EUR and $1.28/BP, respectively. The s's of the spot exchange rates of the EUR and BP, based on the daily changes of spot rates over the past six months, are 65 bp and 45 bp, respectively. Determine the bank's 10- day VAR for both currencies. Use adverse rate changes in the 95 percentile.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

9.11. Bank of Southern Tasmania has determined that its
inventory of 20 million euros (EUR) and 25 million British
pounds (BP) is subject to market risk. The spot exchange
rates are $0.40/EUR and $1.28/BP, respectively. The s's of
the spot exchange rates of the EUR and BP, based on the
daily changes of spot rates over the past six months, are
65 bp and 45 bp, respectively. Determine the bank's 10-
day VAR for both currencies. Use adverse rate changes in
the 95th percentile.

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Step 1: Define Value at Risk (VAR)

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Step 2: Calculation of FX position in $ and maximum Daily loss

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Step 3: Calculation of VAR(value Basis) and 10 day VAR for both currency in $ terms

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