Cranfield Ltd (a UK-based company) expects to receive 50 million euros in 90-
days. The expected percentage changes in Euro over a 90-day period is -1% with
a standard deviation of 5%.
Assume the exchange rate today is £0.80/€
i. Provide a qualitative description of Cranfield’s exchange rate exposure to the euro.
ii. Calculate the maximum percentage loss with 99% confidence level that Cranfield could suffer over the 90-day period if Cranfield does not hedge this exposure. (Hint: z90 =1.282; z95 =1.645; z99 =2.326)
iii. Calculate the pound value of the maximum loss with 99% confidence level, that Cranfield could suffer over the 90-day period if it does not hedge this exposure.