Calculate the standard deviation of the change in the dollar

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Reference no: EM131406455

Some time ago a company entered into a forward contract to buy £1 million for $1.5 million. The contract now has six months to maturity. The daily volatility of a six month zero coupon sterling bond (when its price is translated to dollars) is 0.06% and the daily volatility of a six month zero coupon dollar bond is 0.05%. The correlation between returns from the two bonds is 0.8. The current exchange rate is 1.53. Calculate the standard deviation of the change in the dollar value of the forward contract in one day. What is the 10-day 99% VaR? Assume that the six month interest rate in both sterling and dollars is 5% per annum with continuous compounding.

Reference no: EM131406455

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