22.6. Assume that Dell Computer, a worldwide manufacturer and mail-order retailer of personal computers, has estimated the following regression associated with its operations in Europe.

 ($€ 1-year forward exchange rate)t

a. How should Dell Computer minimize variance associated with these European operations, using only forward contracts on the $/€

exchange rate? Is your answer affected by whether the European operations are fixed or scalable in size?

b. Assuming that European profits are normally distributed, what is Dell’s profit at risk at the 5 percent significance level, assuming that the percentage change in the $/€ exchange rate is normally distributed and has a volatility of 10 percent? Ignore risk for this calculation.