Yazoo Inc. is a U.S. firm that has substantial international business in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $.01. The yen was $.008 three months ago, $.0085 two months ago, and $.009 one month ago. Yazoo uses today’s spot rate of the yen as its forecast of the spot rate in one month. However, it wants to determine the maximum expected percentage decline in the value of the Japanese yen in one month based on the value at risk (VaR) method and a 95 percent probability. Use the information provided to derive the maximum expected decline in the yen over the next month.
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