Question 21.FSE.14: Assume the following direct exchange rate of the Swiss franc...
Assume the following direct exchange rate of the Swiss franc and Argentine peso at the beginning of each of the last 7 years.
| Beginning of Year | Swiss Franc (SF) | Argentine Peso (AP) |
| 1 | $.60 | $.35 |
| 2 | $.64 | $.36 |
| 3 | $.60 | $.38 |
| 4 | $.66 | $.40 |
| 5 | $.68 | $.39 |
| 6 | $.72 | $.37 |
| 7 | $.76 | $.36 |
a. Assume that you forecast that the Swiss franc will appreciate by 3 percent over the next year, but you realize that there is much uncertainty surrounding your forecast. Use the value-at-risk method to estimate (based on a 95 percent confidence level) the maximum level of depreciation in the Swiss franc over the next year, based on the data you were provided.
b. Assume that you forecast that the Argentine peso will depreciate by 2 percent over the next year, but you realize that there is much uncertainty surrounding your forecast. Use the value-at-risk method to estimate (based on a 95 percent confidence level) the maximum level of depreciation in the Argentine peso over the next year, based on the data you were provided.
a. The standard deviation of the annual movements in the Swiss franc is .0557, or 5.57 percent. It is necessary to focus on the volatility of the movements, not the actual values. The maximum level of annual depreciation of the Swiss franc is:
3% – (1.65 × .0557) = -.0619, or -6.19%
b. The standard deviation of the annual movements in the Argentine peso is .0458, or 4.58 percent.
The maximum level of annual depreciation of the Argentine peso is:
-.02 – (1.65 × .0458) = -.0956, or -9.56%