Question: Suppose continuously compounded changes in the spot rate St$/ are independently and identically distributed (iid) as normal. The relation between the variance 2 of continuously

Suppose continuously compounded changes in the spot rate St$/¥ are independently and identically distributed (iid) as normal. The relation between the variance 2 of continuously compounded iid normal returns over a single period (e.g., one year) and the variance of return T2 over T periods is given by T2 = T2.
a. If the standard deviation of continuously compounded spot rate changes is 40% per year, what is the standard deviation of three-month (T = 0.25) changes in the spot rate in continuously compounded returns? If the current spot rate is $0.0100/¥, find the exchange rates that are plus or minus three standard deviations from this after one year.
b. Suppose you collect 52 weeks of spot exchange rates S$/SFr. The standard deviation of continuously compounded spot rate changes is 1.5% per week.
b-1. Assuming instantaneous (continuously compounded) spot rate changes are normally distributed with constant variance, what is the annual standard deviation of continuously compounded spot rate changes?
b-2. The current spot rate is SSFr/$ = SFr1.50/$. What spot rates are ±2( after one year?
b-3. What are the prices for ±2( stated in terms of the S$/SFr spot rate?

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a b OT T0 025 04 020 or 20 per quarter From s ln1s 1s es 30 S So 1s Soe30 001 e340 001 332 00332 30 ... View full answer

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