Financial Decision
Contents
1) Find the distribution and report the mean and the standard deviation of the uncertain revenue in $ 1
2) What is the probability that this revenue will exceed $ 2,250,000? 1
3) What is the probability that this revenue will exceed $ 2,500,000? 1
4) What is the probability that this revenue will be less than $ 2,150,000? 1
5) What is the probability that this revenue will be less than $ 2,000,000? 1
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? 2
7) In Corvette, the Sales manager is willing to accept HSBC’s offer, but the CEO is not. Who is more risk-averse? 2
8) What other risks the bank is taking apart from the uncertainty in the exchange rates? 2
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? 3
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? 3
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? 3
12) What other options does the bank has if they decide not to convert all/some of the currencies in twelve months’ time? 4
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 series. 5
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1) Find the distribution and report the mean and the standard deviation of the uncertain revenue in $ 1
2) What is the probability that this revenue will exceed $ 2,250,000? 1
3) What is the probability that this revenue will exceed $ 2,500,000? 1
4) What is the probability that this revenue will be less than $ 2,150,000? 1
5) What is the probability that this revenue will be less than $ 2,000,000? 1
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? 2
7) In Corvette, the Sales manager is willing to accept HSBC’s offer, but the CEO is not. Who is more risk-averse? 2
8) What other risks the bank is taking apart from the uncertainty in the exchange rates? 2
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? 3
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? 3
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? 3
12) What other options does the bank has if they decide not to convert all/some of the currencies in twelve months’ time? 4
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 series. 5
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