Suppose that the daily volatility of the FTSE 100 stock index (measured in pounds sterling) is 1.8%
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• 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 change in Z is approximately equal to the percentage daily change in X plus the percentage daily change in Y.)
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