(a) Suppose that the daily volatility of the FTSE 100 stock index (measured in pounds sterling) is 1.8% and the daily volatility of the dollar-sterling exchange rate is 0.9%. Suppose further that the correlation between the FTSE 100 and the dollar-sterling exchange rate is 0.4. What is the volatility of the FTSE 100 when it is translated to US dollars? Assume that the dollar-sterling exchange rate is expressed as the number of US dollars per pound sterling. [Hint: When Z=XY, the percentage daily …
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