Question
The U.S. dollar is trading at $1.2565/ and exhibiting volatility of 13%. The one-month continuously compounded spot rates in $ and are 0.72% and 0.25%
The U.S. dollar is trading at $1.2565/ and exhibiting volatility of 13%. The one-month continuously compounded spot rates in $ and are 0.72% and 0.25% p.a. A U.K. firm is considering whether to hedge its USD receivables:
a. Plot the probability distribution of the spot exchange rate one month hence.
b. What's the probability the USD will weaken by 5% or more in the month?
c. What are the 95% confidence bounds on the exchange rate?
d. What's the probability of earning a return of less than -20% p.a. over the next month?
e. What are the 99% confidence bounds on the return earned over the next month?
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