Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC's funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:
A) 5.13%.
B) 2.63%.
C) 4.33%.
D) 5.55%.

Question

Quizplus · Accepted Answer

SOLUTION:
$\begin{aligned}
\sigma _ { y } & = \sqrt { ( .25 ) ^ { 2 } ( .07 ) ^ { 2 } + ( .75 ) ^ { 2 } ( .05 ) ^ { 2 } + 2 ( .25 ) ( .75 ) ( .07 ) ( .05 ) ( .7 ) } \
& = 5.13 \%
\end{aligned}$

Consider an MNC That Is Exposed to the Taiwan Dollar