Quiz 7 Answer (Marcos Carreira got it right)

Marcos Carreira got it right. No wonder he gave me a Brazilian address to send him a copy of TBS. People in Braziou know about high interest rates.

The idea of follows: something that is supposed to drift BUT DOES NOT DRIFT is volatile.

Consequence: when a currency has a high interest rate, spot volatility is totally irrelevant. Using HVT on Bloomberg is not an intelligent idea.

The problem with the question: 100% interest rates can be ambiguous when translating into daily rates. I meant the daily equivalent of 100% interest rates.

So where r is the daily rate, the answer is :

STD= [Sqrt[ Sum [i=1, i=22] [ (0 - r)^2]/22] Sqrt[256] (annualized)

MAD= Sum[i=1,i=22][Abs[0-r]/22] (daily there will be another post on annualization of MAD)

If you use daily r of .4, the answer is 6%. Marcos used a lower daily r but I assumed that he was right and that the interest rate I used in my question was ambiguous.

I got an intelligent answer from Leon Pollard, that monthly volatility should be about 4% (if you measure volatility monthly) --but Marcos beat him to it.

I have another 92 Quizzes --I am in Budapest and I saw a bunch of post Empire men playing chess in a Belle Epoque style spa, standing in a pool of warm spring water. I realized that I find option quizzes far more fun than chess.