CFA CFA Level 3 Currency Management: standard deviation of DC…want to understand the logic behind the formula

Currency Management: standard deviation of DC…want to understand the logic behind the formula

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      @vincentt @RaviVooda

      Why is weight of RFC and RFX in the formula assumed to be 1? I can memorise this but want to understand the logic behind it.

      Thanks!

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        @alta12 because there’s no weighting at all.
        For example, in a portfolio you have 20% stock x and 80% stock y, a 10% loss in stock x only affects 20% of your portfolio hence you need to include the weight as 0.2

        whereas for RFC or RFX they are considered ‘100% allocation’ because if RFC goes down by 10% you will lose the entire 10%
        same goes for RFX so they are both considered 100% hence 1.

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