Consider an MNC that is exposed to the Sri Lankan Rupee (Rs) and the Myanmar Kyat...

Consider an MNC that is exposed to the Sri Lankan Rupee (Rs) and the Myanmar Kyat (MMK). 40% of the MNC's funds are Sri Lankan Rupees and rest are Myanmar Kyats. The standard deviation of exchange movements is 3.5% for Rupees and 11% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .19. Based on this information, the standard deviation of this two-currency portfolio is approximately: A. 12.84 %. B. 7.71 %. C. 7.00 %. D. 5.55 %. E. 3.23 %.

Expert Solution

Standard Deviation of Sri Lankan Rupee = 3.5%

Standard Deviation of Myanmar Kyat = 11%

Correlation coefficient between Sri Lankan Rupee & Myanmar Kyat = 0.19

Weight of Sri Lankan Rupee = 40%

Weight of Myanmar Kyat = 1 - Weight of Sri Lankan Rupee

Weight of Myanmar Kyat = 1 - 40%

Weight of Myanmar Kyat = 60%

Standard Deviation of Portfolio = (Weight of Sri Lankan Rupee * Standard Deviation of Sri Lankan Rupee)² + (Weight of Myanmar Kyat * Standard Deviation of Myanmar Kyat )² + 2 * Weight of Sri Lankan Rupee * Weight of Myanmar Kyat * Standard Deviation of Sri Lankan Rupee* Standard Deviation of Myanmar Kyat * Correlation coefficient between Sri Lankan Rupee & Myanmar Kyat

Standard Deviation of Portfolio = (40% * 3.5%)² + (60% * 11%)² + (2 * 40% * 60% * 3.5% * 11% * 0.19)

Standard Deviation of Portfolio = 0.000196 + 0.004356 + 0.00035112

Standard Deviation of Portfolio = 0.00490312

Standard Deviation of Portfolio = 0.07 or 7%

jeff jeffy answered 1 year ago

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