Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC's funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is 0.85. Based on this information, the standard deviation of this two-currency portfolio is approximately:

Question

Quizplus · Accepted Answer

The standard deviation of a two-currency portfolio can be calculated using the formula: √(w₁²σ₁² + w₂²σ₂² + 2w₁w₂σ₁σ₂ρ), where w₁ and w₂ are the weights, σ₁ and σ₂ are the standard deviations, and ρ is the correlation coefficient. Plugging in the values: √(0.3²(0.1)² + 0.7²(0.15)² + 2(0.3)(0.7)(0.1)(0.15)(0.85)) ≈ 13.15%.

Consider an MNC That Is Exposed to the Bulgarian Lev