Q2) To understand the riskiness of this exposure, compute the standard deviation of the euro cashflow if the Belgian firm remains unhedged against this exposure.
Answer: Var(P) 2586666.6667 ; sdev(P) 1608.3117
Consider a Belgian firm that exports 40000 units of premium beer to the US in the next year. This beer, sold by the ounce, is priced at USD 1/ounce, and the Belgian exporter receives the EUR value of the USD 1 depending on the prevailing spot exchange rate one year from now. Some of the inputs used are imported and, therefore, when the USD/EUR exchange rate depreciates to less than USD 1.1765/EUR, the cost of these inputs increases. The cashflows of the Belgian firm, simulated for three different future values of the exchange rate are given in the table below State 1 State 2 State 3 1/3 1/3 1.1765 1/3 1.0526 Probability Spot Rate(USD/EUR) Sales Sales in USD Sales in EUR Costs (in EUR) Cost of Inputs Other Costs Total Costs Cashflow (in EUR) Before tax After tax (50%) 1.4085 $40 000 $40 000 $40 000 28 400 34 000 38 000 22 000 6 000 28 000 20 000 20 000 6 000 6 000 26 000 26 000 2 400 8 000 10 000 1 200 4 000 5 000 Consider a Belgian firm that exports 40000 units of premium beer to the US in the next year. This beer, sold by the ounce, is priced at USD 1/ounce, and the Belgian exporter receives the EUR value of the USD 1 depending on the prevailing spot exchange rate one year from now. Some of the inputs used are imported and, therefore, when the USD/EUR exchange rate depreciates to less than USD 1.1765/EUR, the cost of these inputs increases. The cashflows of the Belgian firm, simulated for three different future values of the exchange rate are given in the table below State 1 State 2 State 3 1/3 1/3 1.1765 1/3 1.0526 Probability Spot Rate(USD/EUR) Sales Sales in USD Sales in EUR Costs (in EUR) Cost of Inputs Other Costs Total Costs Cashflow (in EUR) Before tax After tax (50%) 1.4085 $40 000 $40 000 $40 000 28 400 34 000 38 000 22 000 6 000 28 000 20 000 20 000 6 000 6 000 26 000 26 000 2 400 8 000 10 000 1 200 4 000 5 000
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