Jensen Co Expects to Pay €50,000 in One Month for Its

question 85

Multiple Choice

Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is $1.35.

• A) -$4,303
• B) -$7,830
• C) -$5,873
• D) -$1,958

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