An Excel spreadsheet containing over 900 days of daily data on a number of different exchange rates and stock indices can be downloaded from the author’s website: www.rotman.utoronto.ca/∼hull/data. Choose one exchange rate and one stock index. Estimate the value of  in the EWMA model that minimizes the value of



i

(vi − i )2 where vi is the variance forecast made at the end of day i − 1 and i is the variance calculated from data between day i and day i + 25. Use the Solver tool in Excel. To start the EWMA calculations, set the variance forecast at the end of the first day equal to the square of the return on that day.

AppendixLO1