Question

Assuming a standard deviation of quarterly change of CAD 4 and an expected change of CAD against USD 1, what's the maxiμm expected loss due to Miami's transaction exposure in CAD over the next quarter? What's the amount of the maxiμm loss in USD?

a. CAD 8, USD 2
b. CAD 16, USD 4
c. CAD 4, USD 1
d. CAD 12, USD 3

Answer 1

The maximum expected loss due to transaction exposure, based on given parameters, is CAD 8 and USD 2, which reflects a two standard deviation shift from the expected change.

Step-by-step explanation:

The question deals with calculating the maximum expected loss due to transaction exposure in forex markets when there is a shift in the exchange rate of Canadian dollars (CAD) against US dollars (USD). Given the standard deviation of the quarterly change is CAD 4 and the expected change is CAD 1 against USD, the maximum expected loss will be two standard deviations from the expected change, which amounts to CAD 1 - (2 * CAD 4) = CAD -7.


However, the choice with CAD -7 is not provided in the options. Instead, the closest answer, which reflects a two standard deviation move, would be CAD 8 (CAD 1 + 2 * CAD 4). This amount in USD would be half of that, as per the ratio given in the options, making the loss USD 2. Therefore, the answer is a. CAD 8, USD 2.