Another currency question.....

CFA Level III
#1

Question… correct or incorrect and answer:

The risk to me of an overseas equity will always be higher than the risk borne on the same security by an investor residing in that overseas country.

INCORRECT.

If the correlaiton between the stock’s return and the currency movement is negative, the standard deviation of the stock’s return in dollar terms will be lower than its standard deviation in the local currency.

Can someone explain this? I know its a good thing when the correlation of a stock is low/negative with its currency movement. Since if they had a positive correlaiton: a stock has a negative return, and the currency would have a negative return also.

When the answer said currency movement… not sure what that movement means…

Thanks!

#2

An investor who buys an asset denominated in a foreign currency (FC) is exposed to two risks:

  1. asset ‘movements’ in FC (i.e. asset going up or down in FC terms);

  2. FC ‘movements’ vs domestic ccy (i.e. FC going up or down in domestic ccy terms);

An investment in FC-denominated asset is like buying two assets: one asset is the security that can move up or down in the ccy of denomination.

The second asset is the FC itself that can move up or down in terms of domestic ccy.

Good luck, Carlo