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USA Super Cars

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Written by: admin

Date Created: September 8, 2024

Last Modified: September 8, 2024

Scenario: USA Super Cars and Luxury Sports Car Sales

USASuperCars sells luxury sports cars. It has just signed a contract to sell a batch of these supercars to various customers around the globe on New Year’s Day (01-01-2016). The following table shows the orders from eight customers. The selling prices are fixed and in local currencies at the exchange rate prevailing at the time of delivery. Of course, there is uncertainty in the exchange rates, and in order to cope with this uncertainty, estimates of the expected value and standard deviation of these have been provided by the Bank of America for all but one (EUR) of the currencies. The report that came with these estimates stated that these rates are normally distributed and independent.

Questions

  1. For the exchange rate of EUR/USD, where estimates are not available, create an estimate by using the daily closing values of the exchange rate from the last 24 months. Argue which period might be most relevant, if you decide to use less than the full 24-month period to create your estimate. Assume that the exchange rate is normally distributed, calculate the mean and the standard deviation, and use these to fill in the values for France in the table of orders.
  2. Specify the distribution and report the mean and the standard deviation of total revenue in USD.
  3. a) What is the probability that this revenue will exceed $2,280,000?
  4. b) What is the probability that this revenue will be less than $2,160,000?
  5. HSBC offers to pay a certain sum of $2,150,000, in return for the uncertain revenue in local currencies. Give an opinion as to whether this is a good offer for USASuperCars or not.
  6. The Sales Manager of USASuperCars is willing to accept HSBC’s offer, but the CEO is not. Who is more risk-averse?
  7. What other risks is the bank taking, apart from the uncertainty in the exchange rates?
  8. If the offer is to pay the certain sum next week rather than on New Year’s Day, would that make any difference? When would the bank and when would the company prefer the payment to be made, and why?
  9. USASuperCars has accepted HSBC’s offer. 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?
  10. 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?
  11. What other options does the bank have if they decide not to convert all/some of the currencies on New Year’s Day?

Marking Scheme

50% of the mark comes from the aforementioned ten questions (5% for each), and 50% from the overall presentation of the business report. A business report must have a polished presentation, including:

  • A well-designed cover
  • A good executive summary
  • An introduction and a main body that reads smoothly and uses layman’s terms (avoid excessive statistical jargon)
  • Graphs and illustrations (use color where possible)

The report should not assume the readership has an academic background. References should primarily come from practitioner/business sources (e.g., websites, press articles), and technical details or analysis should be placed in an appendix. The main body should not exceed 2500 words.

Worldwide Orders & Exchange Rates (to USD)

CustomerQuantitySelling PriceExpected Value (Mean)Standard Deviation
UK10£57,500$1.4M/£$0.041/£
France2€65,000NOT AVAILABLENOT AVAILABLE
Japan 15¥8,400,000$0.009/DDY$0.00045/DDY
Japan 23¥9,000,000$0.009/DDY$0.00045/DDY
Canada 12CAD 97,000$0.824YY/CAD$0.0342/CAD
Canada 22CAD 100,000$0.824YY/CAD$0.0342/CAD
South Africa2R 4,100,000$0.0211/R$0.00083/R
USA1$100,000

Essay Requirements

Your essay must include your birthday: 11/08/1987. You will receive two documents via email: one with the numbers and questions related to the essay and the other as an example. However, your essay should take a more academic approach and not look exactly like the example. Additionally, Excel files must be included as part of the essay submission.

The essay must have an executive summary that convinces the reader. It should resemble a Financial Times journal article with clear graphs, illustrations, and a professional tone. The language should be accessible to a general audience, similar to what you might find in a Financial Times article. The essay structure is flexible, but all questions must be answered thoroughly. At least one page should address all the questions shown in the document.

Thank you!

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