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What is economic integration? What impact does the extent of economic integration of international markets have on the investment opportunities for FIs?

An FI has $100 000 of net positions outstanding in UK pounds (£) and −$30 000 in Swiss francs (SF). The standard deviation of the net positions as a result of exchange rate changes is 1 per cent for the £ and 1.3 per cent for the SF. The correlation coefficient between the changes in exchange rates of the £ and the SF is 0.80.

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a. What is the risk exposure to the FI of fluctuations in the £/$ rate?

b. What is the risk exposure to the FI of fluctuations in the SF/$ rate?

c. What is the risk exposure if both the £ and the SF positions are combined?

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