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Consider FX Inc. that on March 1, 1999, expects to receive one million Swiss francs (SFr) on June 1, 1999. Based on annual data for the USD/SFr exchange rate, it has been found that E(DST+1)=-0.00132 and Var(DST+1)=0.00756. Assume that the monthly exchange rate changes are normally distributed and the exchange rate on March 1, 1999 is 0.81.
a. Find the 5% cash flow at risk (CaR). Given that its target CaR is $49,670, is FX Inc. running too much risk?
b. Find the 5% value at risk (VaR). Assume that there are 21 trading days per month and the price of a three-month zero coupon bond in SFr is 0.96 SFr. Ignore interest rate uncertainty and exchange rate changes over one day.
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