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AACE International

Italy Section
Uncertainty of costs due to foreign currencies fluctuation
A practical approach to quantitative estimation of Transaction Risk
based on an adaptation of a Stock Price Volatility Model

Milano – 19 Maggio 2017

Lucio Provenzani, CCP


AACE International - Italy Section

Transaction Risk is:


• a practical estimating problem
• a practical accounting/finance problem
• a practical Project Management problem
• difficult to mitigate
• difficult to quantify

but
It can be modeled (based on Stock Analysis techniques)

All examples and calculations are made from a US Dollar (domestic) perspective
AACE International - Italy Section

What are we talking about:

Effects on Corporate Finance Effects on Project Finance

Economic Exposure Translation Exposure Transaction Exposure


(Related to value of Capital (For multinational (Related to contractual
and Investments abroad) Consolidated Statements) cash flow)

Financial Exposure
Possible Strategies:

• Avoid the Transaction Risk


– “Standard Currency” (Oil is traded in US Dollars,
everywhere; only US gets the benefit; not possible for
other commodities/goods; related to Dollar strenght)
– “Netting” (balancing Revenues and Expenses in each
foreign country; only big international companies can do
this; very complex and difficult to manage)
Possible Strategies:

• Transfer the Risk through Financial Hedging


– “Forward Contracts” (Need to negotiate with a bank a
future exchange rate; the Bank take the risk, but this has
a cost)
– “Derivatives” (Futures and Options are instruments
available on the market to offset the gain or loss related
to a future transaction); needs expertise
Possible Strategies:

• Transfer/Mitigate the Risk through Money Market


Hedging
– Borrow money, exchange it in the foreign currency and
reinvest it at fix rate until payable is due (will result in
additional cost, a different risk is created; not all PM can
do this; need access to a foreign bank; tax complexities)
AACE International - Italy Section

What if you cannot Avoid or Mitigate/Transfer the risk?

Most of the times the transaction risk ends being accepted;


Therefore, it is essential to:
– Know the risk
– Evaluate it
– Consider a contingency
Risk
Big Contingency Aversion
reserve Low

Risk Small
Aversion Conting.
High Res.
AACE International - Italy Section

Know the risk


If foreign currency exchange rate will increase,
obligations/payables will be higher than expected

• Lots of studies and technical analysis on FX market


But (practical question)
• If you have to pay 1M Yen a year from now, how many
Dollars/Euros should be committed?
Generally
For a period of ‘s” days,
how can the exchange rate relative change be modeled?
So that :
on the basis of a determinate risk aversion
a specific contingency reserve can be established?
AACE International - Italy Section

The Model
Knowing the probability distribution of the exchange rate
over a period of time, the most unfavorable exchange rate
could be calculated for any confidence level.
Example:

Todays exchange rate $/€ = 0.91

Two years form now there will be a


~ 50% probability that the rate will be
higher (and ~ 50% probability it will be
lower).

What exchange rate should be


considered to have 95% probability it
will be lower?
AACE International - Italy Section

• Studied five currencies (EUR, GPB, MXN, JPY, CHF) daily


Exchange rate behavior vs Dollar on a 10 year period
(2005-2014)
Definition of “Daily exchange rate relative change”

Example: if the exchange rate increases 1% in one day, the value will be 0.01
if the exchange rate decreases 2% in one day, the value will be -0.02
AACE International - Italy Section

𝐒 $/𝐅𝐅 𝐭
= 𝟏 + 𝐑 𝐭−𝟏,𝐭
𝐒 $/𝐅𝐅 𝐭−𝟏

Which represents the “Daily Spot Exchange Rate Relative Variation”

Example: if the exchange rate increases 1% in one day, the value will be 1.01
if the exchange rate decreases 2% in one day, the value will be 0.98
AACE International - Italy Section
Data from Oanda (www.oanda.com)
AACE International - Italy Section
Data from Oanda (www.oanda.com)
AACE International - Italy Section
Data from Oanda (www.oanda.com)

Findings:
1) Confirms that Currencies Exchange rates behave very
differently, driven by global and local political and economical
events, but,
2) The FX market “has no memory”. The day by day exchange rate
variation does not depend on previous periods events, neither
on trends.
AACE International - Italy Section

Statistical Distribution of daily Exchange rate Variation

• As asserted by many studies (Fujihara, Kehwan, etc.)


currencies daily exchange rate variation “does not
exactly behave in accordance with the Normal
Distribution, but quite closely”
AACE International - Italy Section
AACE International - Italy Section
AACE International - Italy Section
𝐒 $/𝐅𝐅 𝐭
In the observed period
𝐒 $/𝐅𝐅 𝐭−𝟏

1) The Means are subject to the length of the period observed and
to the external events. It cannot be used to predict future
behavior.
2) The Standard deviation of the day by day rate change is
meaningful.
3) The daily exchange rate variation “does not exactly behave in
accordance with the Normal Distribution, but quite closely”
AACE International - Italy Section

Distribution of a period “s” exchange rate change

For any definite period “t-s” to “t”

𝐒 $/𝐅𝐅 𝐭
Daily Spot Exchange Rate Relative Variation = 𝟏 + 𝐑 𝐭−𝟏,𝐭
𝐒 $/𝐅𝐅 𝐭−𝟏

Period S Exchange Rate Relative Variation


AACE International - Italy Section

Distribution of a period “s” exchange rate change


For any definite period “t-s” to “t”

Period S Exchange Rate Relative Variation


Daily Spot Exchange Rate Relative Variation
AACE International - Italy Section

Distribution of a period “s” exchange rate change

Central Limit Theorem


Given a distribution with mean 𝝁 and variance 𝛔 2
the sampling distribution of the mean
approaches a normal distribution
with mean 𝝁 and variance 𝛔 2/n
as sample size increases
AACE International - Italy Section

Distribution of a period “s” exchange rate change


Knowing that in general, for the independent variable
𝑺 $/𝑭𝑭 𝒊
𝒍𝒍
𝑺 $/𝑭𝑭 𝒊−𝟏
𝑺 $/𝑭𝑭 𝒊 𝐒 $/𝑭𝑭 𝐢+𝟏
𝝁 = 𝒎𝒎𝒎𝒎 𝒍𝒍 𝛔 = 𝐬𝐬𝐬 𝐝𝐝𝐝 𝐥𝐥
𝑺 $/𝑭𝑭 𝒊−𝟏 𝐒 $/𝑭𝑭 𝒊

For any definite period “t-s” to “t”


𝑺 $/𝑭𝑭 𝒕
𝒍𝒍 is normally distributed
𝑺 $/𝑭𝑭 𝒕−𝒔

With Mean = 𝐬𝝁 =𝝁* With Std dev = √s𝛔 = 𝛔*


𝑺 $/𝑭𝑭 𝒕
is log-normally distributed
𝑺 $/𝑭𝑭 𝒕−𝒔
AACE International - Italy Section

Normal / Log-normal
Distribution relationship

Probability

Value of
𝑺 $/𝑭𝑭 𝒕
𝒍𝒍 𝑺 $/𝑭𝑭 𝒕−𝒔

𝝁 ∗= 𝐬𝐬 𝛔 ∗= 𝐬𝛔
Value of
𝑺 $/𝑭𝑭 𝒕
𝑺 $/𝑭𝑭 𝒕−𝒔
AACE International - Italy Section

Useful MS Excel© Function can solve


this in a very straightforward way
LOGNORM.INV (probability, mean, standard dev)
The LOGNORM.INV function syntax requires the following arguments:
•Probability A probability associated with the lognormal distribution.
•Mean The mean of ln(x).
•Standard_dev The standard deviation of ln(x).

𝐒 $/𝐅𝐅 𝐭
The function will then give back the x = 𝐒 $/𝐅𝐅 𝐭−𝐬

Basically , after a certain number of days “s”, what will be the higher (less
favorable) exchange rate for the considered probability (confidence level)?
AACE International - Italy Section
Data from Oanda (www.oanda.com)
Logarithm of the one period exchange
Daily Spot Exchange Rates - S($/FC) Daily Exchange Rate Variation Ratio
rate variation ratio

End Date USD/EUR USD/GBP USD/MXN USD/JPY USD/CHF USD/EUR USD/GBP USD/MXN USD/JPY USD/CHF USD/EUR USD/GBP USD/MXN USD/JPY USD/CHF
1/1/2005 0.737 0.5212 11.115 102.39 1.1394
1/2/2005 0.7371 0.5209 11.106 102.56 1.1401 1.0001 0.9994 0.9992 1.0017 1.0006 0.0001 -0.0006 -0.0008 0.0017 0.0006
1/3/2005 0.7382 0.5209 11.106 102.7 1.1408 1.0015 1.0000 1.0000 1.0014 1.0006 0.0015 0.0000 0.0000 0.0014 0.0006
1/4/2005 0.7423 0.525 11.213 102.68 1.1472 1.0056 1.0079 1.0096 0.9998 1.0056 0.0055 0.0078 0.0096 -0.0002 0.0056
1/5/2005 0.7536 0.5315 11.386 104.64 1.1688 1.0152 1.0124 1.0154 1.0191 1.0188 0.0151 0.0123 0.0153 0.0189 0.0187
1/6/2005 0.754 0.5309 11.356 104.07 1.1684 1.0005 0.9989 0.9974 0.9946 0.9997 0.0005 -0.0011 -0.0026 -0.0055 -0.0003
1/7/2005 0.7589 0.5333 11.352 105.03 1.1742 1.0065 1.0045 0.9996 1.0092 1.0050 0.0065 0.0045 -0.0004 0.0092 0.0050
1/8/2005 0.7664 0.535 11.246 104.81 1.1851 1.0099 1.0032 0.9907 0.9979 1.0093 0.0098 0.0032 -0.0094 -0.0021 0.0092
1/9/2005 0.7656 0.5344 11.246 104.81 1.1844 0.9990 0.9989 1.0000 1.0000 0.9994 -0.0010 -0.0011 0.0000 0.0000 -0.0006
1/10/2005 0.7659 0.5346 11.246 104.82 1.1848 1.0004 1.0004 1.0000 1.0001 1.0003 0.0004 0.0004 0.0000 0.0001 0.0003

12/26/2014 0.82 0.6426 14.7156 120.45 0.9858 0.9994 0.9983 0.9976 0.9998 0.9993 -0.0006 -0.0017 -0.0024 -0.0002 -0.0007
12/27/2014 0.8198 0.6427 14.7097 120.3 0.9858 0.9998 1.0002 0.9996 0.9988 1.0000 -0.0002 0.0002 -0.0004 -0.0012 0.0000
12/28/2014 0.8207 0.6424 14.7093 120.34 0.987 1.0011 0.9995 1.0000 1.0003 1.0012 0.0011 -0.0005 0.0000 0.0003 0.0012
12/29/2014 0.8207 0.6424 14.7094 120.34 0.987 1.0000 1.0000 1.0000 1.0000 1.0000 0.0000 0.0000 0.0000 0.0000 0.0000
12/30/2014 0.8207 0.6429 14.708 120.47 0.9872 1.0000 1.0008 0.9999 1.0011 1.0002 0.0000 0.0008 -0.0001 0.0011 0.0002
12/31/2014 0.8226 0.6437 14.7589 119.93 0.9894 1.0023 1.0012 1.0035 0.9955 1.0022 0.0023 0.0012 0.0035 -0.0045 0.0022

Average 0.7492 0.5927 12.1552 99.18 1.0575 Mean (μ) 0.00003 0.00006 0.00008 0.00004 -0.00004
Low 0.6269 0.4751 9.8876 75.74 0.7253
High 0.8566 0.7281 15.4486 123.95 1.3249 Standard Deviation (σ) 0.00429 0.00413 0.00532 0.00454 0.00462
AACE International - Italy Section

Specific vs Systematic Risk


AACE International - Italy Section

Another (hopefully better) way to predict the future exchange rate:


International Fisher Effect
The expected change in the current exchange rate
between any two currencies
is approximately equivalent to
the difference
between the two countries' nominal interest rates
for that time

𝑰𝟏 −𝑰𝟐 Where:
𝐑 𝐭−𝟏,𝐭 = "E" represents the % change in the exchange rate
𝟑𝟑𝟑 “I1" represents country A's interest rate
“I2" represents country B's interest rate
AACE International - Italy Section

𝐒 $/𝐅𝐅 𝐭
= 𝟏 + 𝐑 𝐭−𝟏,𝐭
𝐒 $/𝐅𝐅 𝐭−𝟏

𝐒 $/𝐅𝐅 𝐭 𝑰𝑭𝑭 − 𝑰$
=𝟏+
𝐒 $/𝐅𝐅 𝐭−𝟏 𝟑𝟑𝟑

𝑺 $/𝑭𝑭 𝒊 𝑰𝑭𝑭 −𝑰$


𝒍𝒍 = 𝒍𝒍 𝟏 +
𝑺 $/𝑭𝑭 𝒊−𝟏 𝟑𝟑𝟑
AACE International - Italy Section

A country with a higher interest rate will also tend to have a


higher inflation rate. This increased amount of inflation should
cause the currency in the country with the high interest rate to
depreciate against a country with lower interest rates.
Foreign Currencies
USD Central Bank Interest
Central Bank Interest Rate 𝑰𝑭𝑭 − 𝑰$
Rate FC (1 Jul 2015):
𝑰𝑭𝑭 − 𝑰$ 𝒍𝒍 𝟏 +
(1 Jul 2015):
𝟑𝟑𝟑
“I$” “IFC”
EUR 0.0005 -0.00075 -0.00000208
GPB 0.0050 0.00375 0.00001042
0.00125 MXP 0.0300 0.02875 0.00007986
JPY 0.0100 0.00875 0.00002431
CHF -0.0075 -0.00875 -0.00002431

The mean exchange rate daily change calculated with the IFE has more chances
to better represent the future changes
AACE International - Italy Section

𝑺 $/𝑭𝑭 𝒊
For 𝒍𝒍
𝑺 $/𝑭𝑭 𝒊−𝟏

USD/EUR USD/GBP USD/MXN USD/JPY USD/CHF

Mean (μ) 0.000030096 0.000057819 0.000077664 0.000043308 -0.000038663


Standard Deviation (𝜎) 0.004287620 0.004134891 0.005319506 0.004544515 0.004622450

Therefore Becomes:

USD/EUR USD/GBP USD/MXN USD/JPY USD/CHF

Mean (μ) -0.000002083 0.000010417 0.000079858 0.000024305 -0.000024306


Standard Deviation (𝜎) 0.004287620 0.004134891 0.005319506 0.004544515 0.004622450
AACE International - Italy Section
LOGNORM.INV (probability, mean, standard dev)
IFE Mu Hist. Sigma
USD/EUR -0.00000208 0.004287620
USD/GBP 0.00001042 0.004134891
USD/MXN 0.00007986 0.005319506
USD/JPY 0.00002431 0.004544515
USD/CHF -0.00002431 0.004622450
Stats -0.000002080 0.004287620
Prob 0.75

1.3

1.25
Cumulative Probability

1.2

1.15

1.1

1.05

0.95
0 50 100 150 200 250 300 350

Days
Days 30 60 90 120 150 180 210 240 270 300 330 360
Risk Factor 1.015963897 1.022651652 1.0278132 1.0321848 1.0360517 1.03956 1.0427968 1.0458186 1.0486647 1.0513637 1.0539372 1.0564021
AACE International - Italy Section
AACE International - Italy Section
AACE International - Italy Section
AACE International - Italy Section
AACE International - Italy Section
AACE International - Italy Section

Risk Coefficient USD to EUR Risk Coefficient USD to GPB


Confidence Level Confidence Level
Months 99% 95% 90% 80% 60% 50% Months 99% 95% 90% 80% 60% 50%
1 1.0565 1.0396 1.0307 1.0200 1.0059 0.9999 1 1.0549 1.0386 1.0300 1.0197 1.0061 1.0003
2 1.0807 1.0564 1.0436 1.0284 1.0084 0.9999 2 1.0787 1.0552 1.0429 1.0282 1.0089 1.0006
3 1.0997 1.0695 1.0537 1.0349 1.0102 0.9998 3 1.0974 1.0682 1.0530 1.0348 1.0110 1.0010
4 1.1160 1.0806 1.0622 1.0403 1.0118 0.9997 4 1.1135 1.0794 1.0616 1.0405 1.0129 1.0013
5 1.1305 1.0905 1.0697 1.0452 1.0132 0.9997 5 1.1279 1.0893 1.0693 1.0456 1.0146 1.0016
6 1.1438 1.0995 1.0766 1.0495 1.0144 0.9996 6 1.1411 1.0984 1.0763 1.0502 1.0162 1.0019
7 1.1561 1.1079 1.0830 1.0536 1.0155 0.9996 7 1.1534 1.1069 1.0829 1.0545 1.0177 1.0022
8 1.1677 1.1157 1.0889 1.0573 1.0166 0.9995 8 1.1650 1.1149 1.0890 1.0585 1.0191 1.0025
9 1.1787 1.1231 1.0945 1.0609 1.0175 0.9994 9 1.1761 1.1224 1.0949 1.0624 1.0204 1.0029
10 1.1892 1.1301 1.0998 1.0643 1.0185 0.9994 10 1.1866 1.1297 1.1004 1.0660 1.0217 1.0032
11 1.1992 1.1369 1.1049 1.0675 1.0194 0.9993 11 1.1968 1.1366 1.1058 1.0695 1.0229 1.0035
12 1.2089 1.1433 1.1098 1.0705 1.0202 0.9992 12 1.2066 1.1433 1.1109 1.0729 1.0241 1.0038
13 1.2183 1.1496 1.1145 1.0735 1.0210 0.9992 13 1.2161 1.1497 1.1158 1.0762 1.0253 1.0041
14 1.2274 1.1556 1.1190 1.0763 1.0218 0.9991 14 1.2253 1.1560 1.1207 1.0793 1.0264 1.0044
15 1.2362 1.1614 1.1234 1.0791 1.0225 0.9991 15 1.2342 1.1621 1.1253 1.0824 1.0275 1.0048
16 1.2448 1.1671 1.1277 1.0817 1.0232 0.9990 16 1.2430 1.1680 1.1299 1.0854 1.0286 1.0051
17 1.2532 1.1726 1.1318 1.0843 1.0239 0.9989 17 1.2515 1.1738 1.1343 1.0883 1.0297 1.0054
18 1.2613 1.1780 1.1359 1.0868 1.0246 0.9989 18 1.2599 1.1794 1.1386 1.0911 1.0307 1.0057
19 1.2693 1.1833 1.1398 1.0893 1.0252 0.9988 19 1.2681 1.1850 1.1429 1.0939 1.0317 1.0060
20 1.2772 1.1884 1.1436 1.0917 1.0258 0.9987 20 1.2762 1.1904 1.1470 1.0967 1.0327 1.0064
21 1.2849 1.1935 1.1474 1.0940 1.0265 0.9987 21 1.2841 1.1957 1.1511 1.0993 1.0337 1.0067
22 1.2925 1.1984 1.1511 1.0963 1.0271 0.9986 22 1.2919 1.2009 1.1551 1.1020 1.0347 1.0070
23 1.2999 1.2032 1.1547 1.0985 1.0276 0.9985 23 1.2995 1.2061 1.1591 1.1045 1.0356 1.0073
24 1.3072 1.2080 1.1582 1.1007 1.0282 0.9985 24 1.3071 1.2112 1.1629 1.1071 1.0366 1.0076
AACE International - Italy Section

Risk Coefficient USD to MXP Risk Coefficient USD to JPY


Confidence Level Confidence Level
Months 99% 95% 90% 80% 60% 50% Months 99% 95% 90% 80% 60% 50%
1 1.0736 1.0523 1.0410 1.0276 1.0099 1.0024 1 1.0608 1.0428 1.0334 1.0221 1.0071 1.0007
2 1.1073 1.0762 1.0600 1.0408 1.0155 1.0049 2 1.0875 1.0616 1.0480 1.0318 1.0105 1.0015
3 1.1344 1.0956 1.0755 1.0516 1.0204 1.0073 3 1.1087 1.0764 1.0595 1.0395 1.0133 1.0022
4 1.1583 1.1126 1.0891 1.0612 1.0250 1.0098 4 1.1270 1.0891 1.0695 1.0462 1.0158 1.0030
5 1.1801 1.1282 1.1015 1.0700 1.0293 1.0122 5 1.1434 1.1006 1.0784 1.0522 1.0180 1.0037
6 1.2004 1.1427 1.1131 1.0783 1.0334 1.0147 6 1.1586 1.1111 1.0866 1.0577 1.0202 1.0044
7 1.2196 1.1564 1.1241 1.0862 1.0374 1.0171 7 1.1728 1.1210 1.0943 1.0629 1.0222 1.0052
8 1.2380 1.1696 1.1347 1.0938 1.0414 1.0196 8 1.1862 1.1303 1.1016 1.0678 1.0242 1.0059
9 1.2557 1.1822 1.1448 1.1011 1.0453 1.0221 9 1.1990 1.1392 1.1085 1.0724 1.0260 1.0067
10 1.2728 1.1945 1.1547 1.1082 1.0491 1.0246 10 1.2113 1.1477 1.1151 1.0769 1.0278 1.0074
11 1.2895 1.2064 1.1642 1.1152 1.0528 1.0271 11 1.2232 1.1558 1.1215 1.0812 1.0296 1.0082
12 1.3058 1.2180 1.1736 1.1220 1.0566 1.0296 12 1.2347 1.1637 1.1276 1.0854 1.0313 1.0089
13 1.3217 1.2293 1.1827 1.1287 1.0602 1.0321 13 1.2458 1.1714 1.1336 1.0894 1.0330 1.0097
14 1.3374 1.2405 1.1917 1.1353 1.0639 1.0346 14 1.2566 1.1789 1.1394 1.0934 1.0347 1.0104
15 1.3528 1.2515 1.2006 1.1417 1.0675 1.0371 15 1.2672 1.1861 1.1451 1.0972 1.0363 1.0111
16 1.3679 1.2622 1.2093 1.1481 1.0711 1.0396 16 1.2776 1.1932 1.1506 1.1009 1.0379 1.0119
17 1.3829 1.2729 1.2179 1.1544 1.0747 1.0421 17 1.2878 1.2002 1.1560 1.1046 1.0395 1.0126
18 1.3977 1.2834 1.2264 1.1607 1.0783 1.0447 18 1.2977 1.2070 1.1613 1.1082 1.0411 1.0134
19 1.4123 1.2938 1.2348 1.1669 1.0819 1.0472 19 1.3075 1.2137 1.1665 1.1118 1.0426 1.0141
20 1.4267 1.3041 1.2431 1.1730 1.0854 1.0497 20 1.3171 1.2203 1.1716 1.1153 1.0441 1.0149
21 1.4411 1.3143 1.2513 1.1791 1.0890 1.0523 21 1.3266 1.2268 1.1766 1.1187 1.0456 1.0156
22 1.4553 1.3244 1.2595 1.1851 1.0925 1.0549 22 1.3360 1.2331 1.1816 1.1221 1.0471 1.0164
23 1.4695 1.3344 1.2676 1.1911 1.0960 1.0574 23 1.3452 1.2394 1.1865 1.1254 1.0486 1.0171
24 1.4835 1.3444 1.2756 1.1971 1.0995 1.0600 24 1.3543 1.2456 1.1913 1.1287 1.0500 1.0179
AACE International - Italy Section

Risk Coefficient USD to CHF


Months Confidence Level
99% 95% 90% 80% 60% 50%
1 1.0603 1.0421 1.0324 1.0209 1.0057 0.9993
2 1.0859 1.0595 1.0457 1.0293 1.0077 0.9985
3 1.1057 1.0729 1.0559 1.0356 1.0090 0.9978
4 1.1226 1.0843 1.0644 1.0408 1.0100 0.9970
5 1.1376 1.0942 1.0718 1.0453 1.0108 0.9963
6 1.1512 1.1033 1.0785 1.0493 1.0115 0.9956
7 1.1638 1.1116 1.0847 1.0529 1.0120 0.9948
8 1.1757 1.1193 1.0903 1.0563 1.0124 0.9941
9 1.1868 1.1265 1.0957 1.0594 1.0128 0.9934
10 1.1974 1.1334 1.1007 1.0623 1.0131 0.9926
11 1.2075 1.1399 1.1054 1.0651 1.0134 0.9919
12 1.2172 1.1461 1.1099 1.0676 1.0136 0.9912
13 1.2266 1.1521 1.1143 1.0701 1.0138 0.9904
14 1.2356 1.1578 1.1184 1.0724 1.0139 0.9897
15 1.2443 1.1634 1.1224 1.0747 1.0140 0.9890
16 1.2528 1.1687 1.1262 1.0768 1.0141 0.9882
17 1.2611 1.1739 1.1299 1.0789 1.0142 0.9875
18 1.2691 1.1789 1.1335 1.0808 1.0142 0.9868
19 1.2769 1.1838 1.1370 1.0827 1.0142 0.9861
20 1.2846 1.1886 1.1403 1.0846 1.0142 0.9853
21 1.2921 1.1932 1.1436 1.0863 1.0142 0.9846
22 1.2994 1.1977 1.1468 1.0880 1.0141 0.9839
23 1.3066 1.2021 1.1499 1.0897 1.0141 0.9832
24 1.3136 1.2065 1.1529 1.0913 1.0140 0.9824
AACE International - Italy Section
AACE International - Italy Section

The simplified practical approach


Number Desired Confidence Level
of
Months 99% 95% 90% 80% 60% μ=0 𝛔 = 𝟎. 𝟎𝟎𝟎
1 1.0800 1.0559 1.0433 1.0282 1.0084
2 1.1150 1.0800 1.0618 1.0402 1.0119
3 1.1426 1.0988 1.0762 1.0494 1.0146
4 1.1664 1.1150 1.0885 1.0573 1.0169
5 1.1878 1.1294 1.0994 1.0642 1.0189
6 1.2074 1.1426 1.1094 1.0706 1.0207
7 1.2258 1.1548 1.1187 1.0764 1.0224
8 1.2432 1.1664 1.1274 1.0819 1.0240
9 1.2597 1.1773 1.1356 1.0871 1.0255
10 1.2755 1.1878 1.1435 1.0920 1.0269
11 1.2908 1.1978 1.1510 1.0967 1.0282
12 1.3055 1.2074 1.1582 1.1012 1.0295
13 1.3198 1.2167 1.1652 1.1056 1.0307
14 1.3337 1.2258 1.1719 1.1098 1.0319
15 1.3472 1.2346 1.1784 1.1139 1.0330
16 1.3605 1.2431 1.1848 1.1178 1.0341
17 1.3734 1.2515 1.1910 1.1216 1.0352 Example:
18
19
1.3861
1.3986
1.2597
1.2677
1.1970
1.2030
1.1254
1.1290
1.0362
1.0372
For a foreign currency obligation/payable
20 1.4108 1.2755 1.2088 1.1326 1.0382 due in 2 years from now, committing todays
21 1.4228 1.2832 1.2144 1.1361 1.0392 value multiplied by 1.305 will result in 95%
22 1.4347 1.2907 1.2200 1.1395 1.0401
23 1.4464 1.2982 1.2255 1.1428 1.0410 confidence that the planned funds will be
24 1.4579 1.3055 1.2308 1.1461 1.0419 sufficient.
AACE International - Italy Section
Back up
Log-normal Distribution