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 .85. Based on this information, the standard deviation of this two-currency portfolio is approximately:
A) 17.28%.
B) 13.15%.
C) 14.50%.
D) 12.04%.

Question

Quizplus · Accepted Answer

SOLUTION: 
$\begin{aligned}
\sigma _ { y } & = \sqrt { ( .30 ) ^ { 2 } ( .10 ) ^ { 2 } + ( .70 ) ^ { 2 } ( .15 ) ^ { 2 } + 2 ( .30 ) ( .70 ) ( .10 ) ( .15 ) ( .85 ) } \
& = 13.15 \%
\end{aligned}$

Consider an MNC That Is Exposed to the Bulgarian Lev