Volatility including currency risk

CFA Level III Derivatives
#1

Hi guys, the book doesn’t make an accent on this, but why when calculating portfolio variance, which includes currency risk, we don’t consider the portfolio as being composed of 50% asset and 50% currency. The wieghts on both are equal to 1 instead.

VarPtf = Var Asset + Var Currency + 2*StdAsset*StdCurrency*Correl(Asset,Currency)

instead of

VarPtf = Var Asset * sqr(0.5) + Var Currency * sqr(0.5) + 2*0.5*0.5*StdAsset*StdCurrency*Correl(Asset,Currency)

Thanks!

#2

how is it 50% asset and 50% currency?

you have 100 Euro - that is 100% of the foreign asset

that entire 100 Euro is converted to $ - that is 100% foreign currency

isn’t it?

#3

100% of your portfolio is the foreign asset and 100% of your portfolio is subject to exchange rate risk, as cpk123 says.

The weights are both 1; they don’t add to 1.

#4

What about Alan Steven case in mock 2011 q 43 and 44 with standard deviation of returns and currency contribution this from a reading 28 section. 3.2 can someone in simple words explain this? Much appreciated…

#5

that is from the previous reading - and does not pertain to this year’s curriculum.

#6

So it is not from reading 28??? Seems like volatility decomposition no?

#7

i should say 44 is not relevant, 43 still is.