What is the correlation between the given two indexes

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Reference no: EM131239553

Suppose that in Problem 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 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.)

Problem :

Suppose that the daily volatility of the FTSE 100 stock index (measured in pounds sterling) is 1.8% and the daily volatility of the dollar/sterling exchange rate is 0.9%. Suppose further that the correlation between the FTSE 100 and the dollar/sterling exchange rate is 0.4. What is the volatility of the FTSE 100 when it is translated to US dollars?

Assume that the dollar/sterling exchange rate is expressed as the number of US dollars per pound sterling. (Hint: When Z = XY, the percentage daily change in Z is approximately equal to the percentage daily change in X plus the percentage daily change in Y.)

Reference no: EM131239553

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