Module 9 Foreign Exchange Rate Risk Homework Exercise Part 1 1.

1. The related spreadsheet contains data for the end-of-day value of the EUR:USD spot exchange rate. Day -101 is 101 days ago and day 0 is today. Thus, this is historic price data. From this historic price data, calculate the historic annual "vol" for this exchange rate.

2. On day 0, your analysis of the Fed's Quantitative Easing strategy leads you to conclude that the euro is about to rise dramatically. So you take $1 million of your wealth, convert it to euros at the Day 0 exchange rate, and invest it in German T-bills paying 2 percent annually. You have decided you will liquidate your position in one year. Calculate your 95% one-year VaR based on historic volatility. [Note 1: Treat the 2% yield on German T-bills as a simple interest rate with annual compounding. Note 2: The spot exchange rate today is the rate associated with Day 0, i.e., 1.3556. The one-year forward rate is currently quoted at 1.3690.]

3. Now suppose that there is a one-year EUR:USD option trading on the U.S. option markets. The price of this option implies a EUR:USD volatility of 18.70%. Based on this alternative measure of volatility, what is the 95% one-year VaR on your speculative position?

4. Briefly describe the difference between an "historic volatility" derived from price data (exchange rate changes in this case) and an "implied volatility" extracted from an option premium. Which do you think is likely to be the better indicator of future volatility? This is the data to work Spot DAY EUR:USD -101 1.3960 -100 1.3928 -99 1.3903 -98 1.3842 -97 1.3837 -96 1.3674 -95 1.3861 -94 1.3871 -93 1.3716 -92 1.3521 -91 1.3423 -90 1.3402 -89 1.3312 -88 1.3125 -87 1.3203 -86 1.3228 -85 1.3159 -84 1.2989 -83 1.3155 -82 1.2998 -81 1.3152 -80 1.3134 -79 1.3034 -78 1.2997 -77 1.2843 -76 1.2794 -75 1.2933 -74 1.3015 -73 1.2893 -72 1.2817 -71 1.2796 -70 1.2900 -69 1.3088 -68 1.3122 -67 1.3262 -66 1.3206 -65 1.3261 -64 1.3302 -63 1.3108 -62 1.2990 -61 1.2968 -60 1.3171 -59 1.2923 -58 1.2978 -57 1.3007 -56 1.3191 -55 1.3296 -54 1.3188 -53 1.3060 -52 1.3239 -51 1.3340 -50 1.3175 -49 1.3067 -48 1.3132 -47 1.3132 -46 1.3167 -45 1.3274 -44 1.3159 -43 1.3200 -42 1.3392 -41 1.3282 -40 1.3272 -39 1.3161 -38 1.3261 -37 1.3451 -36 1.3487 -35 1.3381 -34 1.3573 -33 1.3689 -32 1.3840 -31 1.3888 -30 1.4050 -29 1.4003 -28 1.4143 -27 1.4023 -26 1.3840 -25 1.4008 -24 1.4204 -23 1.4375 -22 1.4367 -21 1.4359 -20 1.4534 -19 1.4494 -18 1.4366 -17 1.4229 -16 1.4069 -15 1.4007 -14 1.3835 -13 1.3821 -12 1.3672 -11 1.3846 -10 1.3762 -9 1.3960 -8 1.3935 -7 1.3885 -6 1.3881 -5 1.3743 -4 1.3703 -3 1.3653 -2 1.3689 -1 1.3694 0 1.3556

daily vol =

annual vol =

The negative number are day from historical data -101 days 0 is today date.

The other sport rate are continuous sport rate at zero day = 1.3556 last value.

I did try to updated on tabular form but the system keeps telling me the question is to long. please use like this. or tell me a way into how can I upload in tabular fomr without getting the error message.