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Real Case study: Financial Decisions
Scenario: Corvette sells luxury sports cars. It has just signed a contract to sell, Twelve months from
now, a batch of these cars to various customers around the globe. The following table shows the
orders of five customers. The selling prices are fixed and in local currencies at the exchange rate
prevailing at the time of the delivery. Of course there is uncertainty in the exchange rates, and in
order to cope with this uncertainty estimates as well as standard deviation of these have been
provided by the Bank of America. The report that came with these estimates stated that these rates
are normally distributed and independent.
1) Find the distribution and report the mean and the standard deviation of the uncertain
revenue in $
2) What is the probability that this revenue will exceed $ 2,250,000?
3) What is the probability that this revenue will exceed $ 2,500,000?
4) What is the probability that this revenue will be less than $ 2,150,000?
5) What is the probability that this revenue will be less than $ 2,000,000?
6) HSBC offers to pay a sure sum of $2,150,000 in return for the revenue in local currencies.
What do you think, is this a good offer for Corvette or not?
7) In Corvette, the Sales manager is willing to accept HSBC’s offer, but the CEO is not. Who is
8) What other risks the bank is taking apart from the uncertainty in the exchange rates?
9) If the offer is to pay the sure sum in three months’ time rather than in twelve months’ time,
would that make any difference? When would the bank and when the company would
prefer the payment to be made, and why?
10) Corvette has accepted HSBC’s offer. Now consider the bank’s risk, assuming the bank will
convert all currencies into US dollars at the prevailing exchange rates. What is the
probability that the bank will incur a loss?
11) The bank defines its Value-at-Risk as the loss that occurs at the 5th percentile of the
uncertain revenue (5% left tail of the distribution). What is the bank’s Value-at-Risk and
what is the bank’s expected profit?
12) What other options does the bank has if they decide not to convert all/some of the
currencies in twelve months’ time?
13) Collect monthly and weekly data for the four exchange rates into consideration in this
exercise for the last (DD+YY) months/weeks up to November 2012 (where DDMMYY is your
date of birth). Graph those eight time series, and fit two different linear regressions model
into each of them. Comment on which you would prefer and why in each of the eight time
14) With the sixteen models you constructed in Question 13 prepare forecasts for the next MM
months/weeks (where DDMMYY is your date of birth).