Question

The most recent estimate of the daily volatility of the U.S. dollar/sterling exchange rate is $0.6 \%$ and the exchange rate at $4 \mathrm{p} . \mathrm{m}$. yesterday was 1.5000 . The parameter $\lambda$ in the EWMA model is 0.9. Suppose that the exchange rate at 4 p.m. today proves to be 1.4950 . How would the estimate of the daily volatility be updated?

   The most recent estimate of the daily volatility of the U.S. dollar/sterling exchange rate is $0.6 \%$ and the exchange rate at $4 \mathrm{p} . \mathrm{m}$. yesterday was 1.5000 . The parameter $\lambda$ in the EWMA model is 0.9. Suppose that the exchange rate at 4 p.m. today proves to be 1.4950 . How would the estimate of the daily volatility be updated?

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 23, Problem 7

Instant Answer

Step 1

The squared return is calculated as the square of the difference between the exchange rate today and the exchange rate yesterday. Squared return = (1.4950 - 1.5000)^2 = 0.000025 Show more…

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The most recent estimate of the daily volatility of the U.S. dollar/sterling exchange rate is $0.6 \%$ and the exchange rate at $4 \mathrm{p} . \mathrm{m}$. yesterday was 1.5000 . The parameter $\lambda$ in the EWMA model is 0.9. Suppose that the exchange rate at 4 p.m. today proves to be 1.4950 . How would the estimate of the daily volatility be updated?

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