[Nyaniso]

Could you please assist with this question :a manufacturing company, based in a country whose currency is the F$. All of F’s sales are within its home country. F imports raw material from Country G, where the currency is the G$.
F’s treasury department manages the currency risks associated with F’s imports and generally buys G$ forward in anticipation of making payments for identified purchases of materials. F’s Chief Financial Officer (CFO) recently received a telephone call from the company’s bank to confirm that an order for a large forward purchase had been completed. The CFO was surprised by the size of the purchase and asked F’s treasurer to comment.
F’s treasurer has become an expert on the exchange rate for the G$. She believes that the forward rate offered by the currency markets was unduly generous and so she bought G$6million forward at a rate of G$/F$ 3.00 which means 1 G$ = 3.00 F$. This was in addition to the purchase of the G$500,000 that F requires to meet its commitments to suppliers.
F’s treasury department is expressly forbidden to take open positions in foreign currencies. The head of internal audit interviewed the treasurer, who explained that she had entered into this position because she believed that it was an opportunity for F to make a profit from her expertise. It was clear that she had not intended to defraud F in any way because the transaction had been recorded correctly.
The Head of Internal Audit reported the facts to F’s directors, who suspended the treasurer on full pay pending a more detailed investigation, including an evaluation of whether F makes a gain or a loss from this position.
F’s CFO is uncertain about whether to cancel this position by selling G$ forward. At present, the exchange rate is G$/F$ 3.10. The forward rate on offer for the maturity date of the open position is G$/F$ 3.20. There are 56 days to go until the open forward purchase matures.
The daily volatility of the G$/F$ exchange rate is 1.2%.
F has approached an economics professor at a local university. The professor has prepared two scenarios concerning potential movements on the exchange rate:
• One possible scenario is that credit agencies will devalue G’s sovereign debt, which would weaken the currency significantly, perhaps to as little as G$/F$ 2.50.
• An alternative scenario is that G’s government could pre-empt the possibility of a devaluation by announcing significant economic measures that could strengthen the rate to anything up to G$/F$3.40.

REQUIRED:
(a) (i) Calculate the 56-day 95% value at risk (VaR), in F$, for the position held by F. (4)
(ii) Calculate the potential gains and losses implied by each of the economic professor’s scenarios. (2)
(iii) Discuss the relevance of the analysis commissioned from the economics professor relative to the VaR calculated in (i) above.

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