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  3. 4. transaction exposure based on value at risk sup

4. Transaction exposure based on value at risk Suppose that Colorado Co., a U.S. based...

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4. Transaction exposure based on value at risk Suppose that Colorado Co., a U.S. based MNC, seciss to assess its transaction expocure csing the value-at-risk (VaR) method over the next quarter. It is primarily concerned about its exposure in euros, as it has determined that the remainder of its portfolio is such that the effects of currency fluctuations typically offect. Suppose that, based on historical data, it has determined that the expected change in the value of the curo is 2.00% over the rext quarter and that the standard deviation of these changes is 2.00%. Colorado assumes that these changes are normally distributed, such that the maximum euarterly loss lies within 1.65 standard deviations below the expected change with 95% confidence. Under this scenario, the maximum one-quarter loss due to transaction exposure is asproximately with 95% confidence. Now suppose that, based on updated dota, the standard deviation of changes in the eure is actually 5.00%. All eise remains unchanged. Under this scenario the maximum one-quarter loss due to transaction exposure is apprcaimately with 95% confidence. Based on these results, the larger standard deviation of the change in the euro, the the maximum loss will be

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