Question
A company is in a forward contract to buy 1.0 million for $1.5million. The contract has six months to maturity. Daily volatility of a 6-month
A company is in a forward contract to buy 1.0 million for $1.5million. The contract has six months to maturity. Daily volatility of a 6-month zero-coupon sterling bond (when it is price translated into dollars) is 0.06%. Daily volatility of a six-month zero-coupon dollar bond is 0.05%. The correlation between returns from the two bonds is 0.8. The current exchange rate is 1.53. The 6-month interest rate in both sterling and dollars is 5% per annum with continuous compounding. Calculate the standard deviation of the change in the dollar value of the forward contract in 1- day, and the 10-day 99% Value at Risk (VaR).
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