financial decions

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

more risk-averse?

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).

Evner: Research Writing

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