Assessing Currency Volatility
Response to the following problem:
Zemart is a U.S. firm that plans to establish international business in which it will export to Mexico (these exports will be denominated in pesos) and to Canada (these exports will be denominated in Canadian dollars) once a month and will therefore receive payments once a month. It is concerned about exchange rate risk. It wants to compare the standard deviation of exchange rate movements of these two currencies against the U.S. dollar on a monthly basis. For this reason, it asks you to
a. Estimate the standard deviation of the monthly movements in the Canadian dollar against the U.S. dollar over the last 12 months.
b. Estimate the standard deviation of the monthly movements in the Mexican peso against the U.S. dollar over the last 12 months.
c. Determine which currency is less volatile. You can use the website www.oanda.com (or any legitimate website that has currency data) to obtain the end of-month direct exchange rate of the peso and the Canadian dollar in order to do your analysis. Show your work. You can use a calculator or a spreadsheet (like Excel) to do the actual computations.