TEA.17.2

Description

We survey the literature on the use of exchange rate models in damage compensation calculations and conduct an analysis of the stationarity properties of the U.S.-Canadian dollar, U.S.-Mexican peso and U.S.-European euro exchange rates. We contend that the long and short run unpredictability in the determination of exchange rates makes it necessary that damage policy ensure that no one party obtains either a windfall or a substantial loss as a result of exchange rate fluctuations. The Black-Scholes model is discussed and recommended as one means of establishing fair awards. The input of currency price in the Black-Scholes model can be reliably estimated from fixed-day valuation methods, and, combined with variables such as number of years of labor lost and current U.S. salary equivalent, can generate award estimates that are robust to substantial prior volatility in currency value vis-à-vis the dollar.