Question 5. (10 points) Using the information given below, compute the standard
ID: 2745366 • Letter: Q
Question
Question 5. (10 points) Using the information given below, compute the standard deviation of the future spot rate of Mexican peso. You must show the computation process by adding the columns in the table, Probability Distribution of Future Spot Rates of Mexican Peso
RANGES OF POSSIBLE SPOT RATES AT THE END OF A QUARTER
Midpoint
Probability
$0.080 to $0.0849
$0.0825
10%
$0.085 to $0.0899
$0.0875
15%
$0.090 to $0.0949
$0.0925
25%
$0.095 to $0.0999
$0.0975
25%
$0.100 to $0.1049
$0.1025
15%
$0.1050 to $0.110
$0.1075
10%
RANGES OF POSSIBLE SPOT RATES AT THE END OF A QUARTER
Midpoint
Probability
$0.080 to $0.0849
$0.0825
10%
$0.085 to $0.0899
$0.0875
15%
$0.090 to $0.0949
$0.0925
25%
$0.095 to $0.0999
$0.0975
25%
$0.100 to $0.1049
$0.1025
15%
$0.1050 to $0.110
$0.1075
10%
Explanation / Answer
To compute standard deviation, we first need to calculate expected spot rate:
M
P
M xP
$0.0825
10%
$0.0083
$0.0875
15%
$0.0131
$0.0925
25%
$0.0231
$0.0975
25%
$0.0244
$0.1025
15%
$0.0154
$0.1075
10%
$0.0108
$0.0950
Expected spot rate(ES) = sum of M x P
= 0.0950
M
P
M-ES
P x (M-ES)^2
$0.0825
10%
($0.0125)
0.000015625
$0.0875
15%
($0.0075)
8.4375E-06
$0.0925
25%
($0.0025)
1.5625E-06
$0.0975
25%
$0.0025
1.5625E-06
$0.1025
15%
$0.0075
8.4375E-06
$0.1075
10%
$0.0125
0.000015625
0.00005125
Standard deviation = ( sum of P x (M-ES)^2)^0.50
= (0.00005125)^0.50
= 0.72%
M
P
M xP
$0.0825
10%
$0.0083
$0.0875
15%
$0.0131
$0.0925
25%
$0.0231
$0.0975
25%
$0.0244
$0.1025
15%
$0.0154
$0.1075
10%
$0.0108
$0.0950
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