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Ch 10 Questions and AnswersQuestion 10.1 The volatility of an asset is 2% per day. What is the standarddeviation of the percentage price change in three days?Answer:%46.33%2Question 10.2 The volatility of an asset is 25% per annum. What is the standarddeviation of the percentage price change in one trading day?Assuming a normal distribution with zero mean, estimate 95%confidence limits for the percentage price change in one day.Answers:The standard deviation of the percentage price change in one dayis %57.1252%25The 95% confidence limits are from 3.09% to +3.09%Question 10.31
Why do traders assume 252 rather than 365 days in a year whenusing volatilities?Answer:Volatility is much higher when markets are open than when theyare closed. Therefore, traders measure time in trading days rather thancalendar days.Question 10.5Suppose that observations on an exchange rate at the end of thepast 11 days were 0.7000, 0.7010, 0.7070, 0.6999, 0.6970,0.7003, 0.6951, 0.6953, 0.6934, 0.6923, 0.6922. Estimate thedaily volatility.