Consider the international currency markets and in particular whether geographical
Consider the international currency markets and, in particular, whether geographical proximity implies association with respect to market movements. Because
FIGURE 11.3.5
FIGURE 11.3.6
the United Kingdom kept the pound and did not convert to the euro, we can examine changes of these important currencies of Europe. Data on daily percentage changes in the price of a dollar, in each of these currencies, are shown in Table 11.3.17.
a. Create a scatterplot of the euro’s against the pound’s percentage changes.
b. Given that the pound and the euro are both used in Europe, we might expect that their values, with respect to the dollar, would tend to move together. To evaluate this, compute and interpret the correlation between the pound’s percentage changes and the euro’s.
c. Test at the 5% level to see if there is a significant link between movements in the pound and the euro.
d. On a day when the euro’s percentage change is half of a percentage point, what would you expectthe pound’s percentage change to be?
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