International Financial Management problem

You are given the following monthly, continuously compounded return (x 100) data

on the USDEUR exchange rate:

monthly st,$/ st,/$

mean 0.11 -0.11

variance 8.27 8.27

std dev 2.88 2.88

Suppose you manage an international fixed income portfolio denominated in euros for

Deutsche Bank in Frankfurt. It is the end of August 2017. Having invested in US

Treasury Bonds in the past, you will be receiving $100 million at the end of August 2018.

Assume there is no chance the US government will default on this payment.

b. Using your answer from part (a), what is your expectation of the spot exchange rate at which you will transact in August 2018 if you do not hedge transactions exchange risk and the exchange rate in August 2017 is St,$/ = 1.2190?

c. What is the nature of the risk of this position?

d. Your manager would like to know the value at risk for this position. Assume the rate of appreciation of the USD relative to the EUR over the next year will be normally

distributed with the means, standard deviations and variances you calculated above. What is the value at risk (VaR) at the 5% level?

e. What cautions would you provide to your manager regarding this VaR analysis?

Look forward to detail analysis and solutions of problem b-e. It would be better to be shown in an excel or doc with explaination and formulas if possible.