Hedge Fund Risk

a) Transform the spot rates into daily rates of return. The rate of return should be in discrete form, i.e. [S(t)-S(t1)]/S(t-1), where S is measured in dollars per yen. You can verify that this is close to a continuously
compounded, or log return ln[S(t)/S(t-1)]. Compute the daily volatility.
b) Compute the monthly rates of return (using an interval of 21 trading days, computed every day). Report the
monthly volatility, computed from overlapping returns.
• Check if the daily and monthly numbers are in line with each other, using the “square root of time” rule. To
assess whether daily returns are uncorrelated, compute the first-order autocorrelation in daily returns and test
whether this is zero.