1. Assume that the domestic volatility (standard deviation in yen) of the Japanese bond market is 8%. The volatility of the yen against the U.S. dollar is 6%.

a. What would the dollar volatility of the Japanese bond market be for a U.S. investor if the correlation between the Japanese stock market returns and exchange rate movements were zero?

b. Suppose the dollar volatility of the Japanese stock market is 11.35%, what can you conclude about the correlation between the Japanese bond market movements and exchange rate movements