can someone please explain this forumla out of R70 (international asset pricing) y = y(LC) + 1
let me see if i can explain this so it makes sense… y(LC) is the sensitivity of an asset to changes in its own currency. y is the sensitivity of holding that asset for a foreign, not local, investor. so if you are from the us and you invest in this foreign asset, you are really investing in 2 things. the actual asset and the currency that the asset is denominated in. so to get the total sensitivity of your investment (asset plus currency), you add y(LC), the asset’s sensitivity to the movements in its own currency, to 1 (the sensitivity of the currency to itself) so if a french firm has a sensitivity of .5 to the euro, when you buy this firm as a us investor, you are exposing yourself to the sensitivity of the firm to the euro (.5) AND the sensitivity of the euro to itself, which is 1. so your total currency exposure on this foreign asset is 1.5. man. this doesn’t even make sense to me now. sorry, i tried. please someone jump in and do a better job than me in explaining.