Using one year (252 trading days) of historical data, you have estimated a daily standard deviation of percent for the exchange rate:

a. What is the annual standard deviation of the exchange rate if continuously compounded exchange rate changes are independently and identically distributed as normal?

b. Suppose the current spot rate of exchange is . Find the exchange rates that are plus or minus two standard deviations from this rate after one year based on annual volatility in part

(a).

c. Verify that volatility is equal to volatility by (1)

translating your of the spot exchange rate and (2) finding the annual standard deviation implied by these rates from.