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20 June, 10:35

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent 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:

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  1. 20 June, 11:02
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    The standard deviation of this two-currency portfolio is approximately is 5.13%

    Explanation:

    According to the given data, if we use the 2 asset portfolio standard deviation formula, we get the starndar deviation of portfolio, therefore, in order to calculate the the standard deviation of this two-currency portfolio we would have to calculate the following formula:

    standard deviation of this two-currency portfolio = [ (25%) 2 (7%) 2 + (75%) 2 (5%) 2 + 2*25%*7%*75%*5%*0.7]1/2 =

    standard deviation of this two-currency portfolio=5.13%

    The standard deviation of this two-currency portfolio is approximately is 5.13%
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