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Answer: $15,659
The position value in USD is: \[ 2{,}000{,}000 \times 1.40 = 2{,}800{,}000 \] A daily volatility of 34 bps means: \[ 0.34\% = 0.0034 \] For a 95% one-tailed VaR, use a z-score of about 1.645: \[ \text{VaR} = 2{,}800{,}000 \times 0.0034 \times 1.645 \approx 15{,}659 \] So the 95% daily DEAR is **$15,659**.
Author: Manit Arora
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Question 192.1. A bank has a EUR 2.0 million trading position in spot Euros. The spot EUR/USD exchange rate is $1.40 (EUR is the base currency, and USD is the quote currency). The daily volatility of the EUR/USD exchange rate is 34 basis points (bps). If the bank assumes the exchange rate volatility is normally distributed, what is the 95% confident daily earnings at risk (DEAR) of the position in US DOLLAR terms, i.e., the 95% dollar VaR due only to foreign exchange (FX) exposure?
A
$7,997
B
$11,185
C
$15,659
D
$28,642
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