A U.S. firm Biqing, Inc., expects to receive substantial payments in Indonesian

Question

A U.S. firm Biqing, Inc., expects to receive substantial payments in Indonesian rupiah and Thai baht in 1 month. Based on today’s spot rates, the dollar value of the funds to be received is estimated at $700,000 for the rupiah and $300,000 for the baht. Thus Biqing is exposed to a currency portfolio weighted 70% in rupiah and 30 % in baht. Based on data for the last 20 months, it estimates the standard deviation of monthly % changes to be 10% for the rupiah and 8% for the baht, and a correlation coefficient of 0.6 between the rupiah and baht. What is the portfolio’s standard deviation?

Explanation / Answer

Portfolio standard deviation=sqrt(0.7^2*10%^2+0.3^2*8%^2+2*0.7*0.3*0.6*10%*8%)=8.6556%

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