Treck Co Expects to Pay €200,000 in One Month for Its

question 46

Multiple Choice

Treck Co. expects to pay €200,000 in one month for its imports from Spain. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is -2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.

• A) -$38,468
• B) -$21,371
• C) -$17,097
• D) -$4,274

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Definitions:

Direct Method

A methodology applied in cash flow statements to present major classes of gross cash receipts and payments, offering a clear view of cash flow from operating activities.

Current Asset

Assets that are expected to be converted into cash, sold, or consumed within one year or a business cycle, whichever is longer.

Current Liability

A company's debts or obligations that are due within one year or within the normal operating cycle.

Accounts Receivable

The money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.