Serving the Quantitative Finance Community
ADR / GDR volatility
Could someone give me a theoritical proof of the formula giving the volatility of an ADR (American Deposit Receipt), which takes a foreign stock as underlying, in a classical Black Scholes framework.sigma(ADR)² = sigma(underlying)² + 2 Correl x sigma(FX) x sigma(underlying) + sigma(FX)²with Correl = correl (exchange rate, underlying) and sigma(FX) = the volatility of the exchange rate.Thanks.Dark.