Suppose that in Problem 10.15 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 254 RISK MANAGEMENT AND FINANCIAL INSTITUTIONS 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