What are Implications of the normal distribution for Finance
What are Implications of the normal distribution for Finance?
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Similar argument could be applied to the daily changes during exchange rate rates, risk of default or interest rates. We get ourselves using the normal distribution rather naturally for various financial processes.As frequently with mathematical ‘laws’ there is the ‘legal’ small print, while the conditions under that the Central Limit Theorem applies.
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Assume that the treasurer of IBM contains an extra cash reserve of $1,000,000 to invest for six months. The six-month interest rate is 8% per annum in the U.S. and 6% per annum in Germany. Now, the spot exchange rate is DM1.60 per dollar and the six-month forw
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