Assume that the domestic volatility (standard deviation) of the German bond market (in euros) is 5.5 percent.

Question:

Assume that the domestic volatility (standard deviation) of the German bond market (in euros) is 5.5 percent. The volatility of the euro against the U.S. dollar is 11.7 percent.
a. What would the dollar volatility of the German market be for a U.S. investor if the correlation between the bond market returns and movements were zero?
b. Suppose the dollar volatility of the German bond market is 13.6 percent. What can you conclude about the correlation between German bond market movements and movements? What might explain this correlation?
Exchange Rate
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