R18 - Currency Management

Question 1

Two sources of return for domestic investor investing in foreign asset?

Answer 1

1. foreign asset return/ risk (std dev)

2. foreign currency return/std dev

Question 2

Return to domestic investor formula given return of asset and FX?

Answer 2

R = (1 + Rfc)(1 + Rfx) - 1

Question 3

Formula for standard deviation of portfolio for domestic investor invested in foreign asset?

Answer 3

σ²(Rdc) = σ²(Rfc) + σ²(Rfx) + 2σ(Rfc)σ(Rfx)corr(fc,fx)

Question 4

Formula for standard deviation of return for foreign risk free asset?

Answer 4

σ(Rdc) = σ(Rfx)( 1 + Rfc)