Question
Assume that you work for company that conducts most of its international business in Mexico and estimates its net cash flows next quarter from Mexico
Assume that you work for company that conducts most of its international business in Mexico and estimates its net cash flows next quarter from Mexico will be $4,000,000 (i.e., after converting from Mexican peso, MXN, to USD). You estimate that the standard deviation of quarterly percentage changes of the MXN is 5% and that the MXN will depreciate by 2 percent against the USD over the next quarter. If your boss asks you to use the value at risk (VaR) method and a 95 percent probability to estimate the companys maximum expected loss due to its transaction exposure to MXN over the next quarter, how much is the VaR both in percentage terms and in dollar terms?
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