# Return & Stan. Dev of Foreign Asset

Couple questions about this… 1. For return on foriegn asset the below is correct, right? DC = Domestic Currency FC = Foreign Currency Return DC = Return FC + % change in X-Rate + (Return FC)*(% change in x-rate) 2. And how do you calculate Standard Deviation (Risk) of a foreign asset in domestic currency terms? I’ve gone thru my notes and can’t seem to find this… Thanks in advance!

variance LC squared + variance currency squared + 2*variance LC*variance currency*correlation basically, take the weights out of normal 2 asset portfolio standard deviation

KRochelli Wrote: ------------------------------------------------------- > variance LC squared + variance currency squared + > 2*variance LC*variance currency*correlation > > basically, take the weights out of normal 2 asset > portfolio standard deviation and then of course you take the square root of final sum…

KRochelli Wrote: ------------------------------------------------------- > variance LC squared + variance currency squared + > 2*variance LC*variance currency*correlation > > basically, take the weights out of normal 2 asset > portfolio standard deviation The idea is right. StDev(DC)=sqrt(Var(LC)+Var(S)+2*StDev(LC)*StDev(S)*correl(LC,S)).

Just to add to this. The reason why the weights are excluded is because you have a 100% weighting in the foreign asset and a 100% weighting in the foreign currency, so weight squared is just 1 - it has a muted effect.

Thanks guys.

I’m confused- Isn’t this going to give you the measure of total risk: StDev(DC)=sqrt(Var(LC)+Var(S)+2*StDev(LC)*StDev(S)*correl(LC,S)). And then you have to subtract the std deviation of the foreign asset to actually extract the standalone risk of the currency? Am I mixing up two different concepts? Thanks in advance.

btw, sorry guys for the error—i hate writing out formulas on computers. i have to think too hard on what keys to press. much easier on paper with greeks smokin’—yes, currency risk is an extension of this equation. it’s the standard deviation(\$) less the standard deviation (LC)