You work as an economist in a big US MNC that has global operations in Australia, Brazil, Europe, UK, Japan and South Africa. The company would like to measure its foreign exchange exposure over the next quarter and if these exposures are beyond a certain limit, the company would like to implement a hedging program. This helps the company to reduce its foreign exchange risks to acceptable levels so its cash flows and thus its value are not affected. The company estimates that $100 million net collection of foreign currency in US dollars over the next quarter distributed as follows: $20 million of Australian Dollar, $15 million of Brazilian Riyals, $20 million of EUROs, $15 million of British Pounds, $20 million of Japanese Yen and $10 million of South African Rand. To measure currency losses that can be realized in a bad quarter, the company would like to compute value at risk at the 5% and 1% level. In particular, the risk management team of the company would like to assess the dollar losses that the company will experience on its foreign currency that is exceeded 5% and 1% of the times respectively. If the losses that are exceeded 1% of the times are greater than $20 million, the company would like to hedge some foreign currency exposure using derivatives. Requirement:

1- Collect time series of monthly exchange rate of the dollar against the Australian Dollar (AUD), Brazilian Real (BRL), Euro (EUR), Japanese Yen (JPY), South African Rand (ZAR) and the UK pound (GBP). Collect for the last 10 years.

2- Compute VAR at the 5% and 1% level of the foreign currency exposures of the company. 3- Discuss how the company may reduce its foreign exchange risks to the required level using derivatives?