Suppose that the daily volatility of the FTSE 100 stock index (measured in pounds sterling) is 1.8% and the daily volatility of the dollar/sterling exchange rate is 0.9%.
Suppose further that the correlation between the FTSE 100 and the dollar/sterling exchange rate is 0.4.
What is the volatility of the FTSE 100 when it is translated to US dollars?
Assume that the dollar/sterling exchange rate is expressed as the number of US dollars per pound sterling.
(Hint: When Z = XY, the percentage daily change in Z is approximately equal to the percentage daily change in X plus the percentage daily change in Y.)