Research Methods

ASB 4601-4801-4101-4851: Research Methods

Instructor: Prof K. Nikolopoulos, Dr. Eng., ITP, P2P

Assignment

Deadline: 27/11/2014 at 16.00 (Weight: 40% of module mark)

Submit BOTH hard-copy and soft-copy(Blackboard)

Real Case study:

Decisions in USASuperCars

Scenario: USASuperCars sells luxury sports cars. It has just signed a contract to sell, in a years’ time,

a batch of these cars to various customers around the globe. The following table shows the orders of

seven customers. The selling prices are fixed and in local currencies at the exchange rate prevailing

at the time of the delivery. Of course there is uncertainty in the exchange rates, and in order to cope

with this uncertainty estimates as well as standard deviation of these have been provided by the

Bank of America. The report that came with these estimates stated that these rates are normally

distributed and independent.

Worldwide Orders Exchange Rate (to $)

Customer Quantity Selling Price Mean Standard

Deviation

UK 12 £ 57,500 $ 1.4MM/£ $ 0.041/£

Japan 1 5 Y 8,400,000 $0.009DD/Y $0.00045/Y

Japan 2 3 Y 9,000,000 $0.009DD/Y $0.00045/Y

Canada 1 1 CAD 97,000 $0.824YY/CAD $0.0342/CAD

Canada 2 3 CAD 100,000 $0.824YY/CAD $0.0342/CAD

South Africa 2 R 4,100,000 $.0.0211/R $.0.00083/R

USA 1 $100,000

DD/MM/YY Is your Date of Birth

Questions:

1) Find the distribution and report the mean and the standard deviation of the

total revenue in $

2) a) What is the probability that this revenue will exceed $ 2,200,000?

b) What is the probability that this revenue will exceed $ 2,225,000?

3) a) What is the probability that this revenue will be less than $ 2,160,000?

b) What is the probability that this revenue will be less than $ 2,130,000?

4) HSBC offers to pay a sure sum of $2,150,000 in return for the revenue in local currencies.

What do you think, is this a good offer for USASuperCars or not?

5) In USASuperCars, the Sales manager is willing to accept HSBC’s offer, but the CEO is not.

Who is more risk-averse?

6) What other risks the bank is taking apart from the uncertainty in the exchange rates?

7) If the offer is to pay the sure sum in three months’ time rather than in twelve months’ time,

would that make any difference? When would the bank and when the company would

prefer the payment to be made, and why?

8) USASuperCars has accepted HSBC’s offer. Now consider the bank’s risk, 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?

9) The bank defines its Value-at-Risk as the loss that occurs at the 5 th

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?

10) What other options does the bank has if they decide not to convert all/some of the

currencies in twelve months’ time?

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 nice cover, a good executive summary, an introduction and a main

body that reads through smoothly and uses ‘lay terms’, not using statistical jargon and be printed,

bound and formatted with the highest possible quality. It must contain a lot of graphs and as much

‘colour’ as possible. No assumptions should be made on the academic background and experience of

the potential readership. References should be used carefully and the majority coming from

practitioner/business sources (www, the press, etc) and any technical details /analysis should be in

an appendix. Overall the main body should not be more than 2500.

Best of Luck, Kostas