Suppose that in Problem 19.12 the correlation between the S&P 500 Index (measured in dollars) and the FTSE 100 Index (measured in sterling) is 0.7, the correlation between the S&P 500 Index (measured in dollars) and the dollar/sterling exchange rate is 0.3, and the daily volatility of the S&P 500 index is 1.6%. What is the correlation between the S&P 500 index (measured in dollars) and the FTSE 100 index when it is translated to dollars? (Hint: For three variables X, Y, and Z, the covariance between X + Y and Z equals the covariance between X and Z plus the covariance between Y and Z.)

AppendixLO1