Thank you for your comment. Actually there would be no effect on our calculations. Keep in mind that the context here (and in the reading) is to examine the effect of currency movements on the volatility of domestic currency returns... so the riskiness of the assets themselves is irrelevant. I made them risk free just to emphasize the fact that we are only focusing on the effects of currency movements. I hope this helps!
thank you so much, very helpful!
Happy to help. Let me know if there are other CFA exam topics that you would like me to cover.
All the best with your studies!
What if the asset risk is not 0%? How does this procedure would change?
Thank you for your comment.
Actually there would be no effect on our calculations.
Keep in mind that the context here (and in the reading) is to examine the effect of currency movements on the volatility of domestic currency returns... so the riskiness of the assets themselves is irrelevant.
I made them risk free just to emphasize the fact that we are only focusing on the effects of currency movements.
I hope this helps!