You are given the following monthly, continuously compounded return (x 100) data on the USDEUR exchange rate:

Monthly	st,$/€	st,€/$
Mean	0.11	-0.11
Variance	8.27	8.27
Std Dev	2.88	2.88

Suppose you manage an international fixed income portfolio denominated in euros for Deutsche Bank in Frankfurt. It is the end of August 2020. Having invested in US Treasury Bonds in the past, you will be receiving $100 million at the end of August 2021. Assume there is no chance the US government will default on this payment.

Assume that the rate of appreciation of the USD relative to the EUR over the next year will be normally distributed and that the exchange rate in August 2020 is S_t,$/€ = 1.2190.

What is the value at risk (VaR) for this position at the 5% level? (Hint: Remember to annualize first!)

Answer rating: 100% (QA)

SOLUTION To calculate the Value at Risk VaR at the 5 level for this position we need to annualize th... View the full answer