# Currency sensitivity question - I'm lost

Question from Schweser sample exams, told from point of view of a UK investor Sensitivity of Slapshot (the Canadian stock) to changes in the Pound/Canadian exchange rate = 1.4. Suppose the C suddenly depreciates by 10% against the Pound. What is most likely to happen to the C\$ value of Slapshot in response to this sudden exchange rate change? A) local currency value will fall 10% B) local currency value will fall 4% C) local currency would be unchanged The answer is B I’m totally lost on this material Here’s the explanation: The sensitivity is a function of the CAD reaction, specifically the sensitivity of the currency return is equal to y(CAD) + 1. Since y = 1.4, y(CAD) must be .4

Currency exposure is in the ICAPM reading. Specifiacally: domestic currency exposure of an asset = foreign currency exposure +1 since the domestic currency exposure is 1.4 (point of view of UK investor) and we are looking for the foreign currency exposure (exposure of C\$) then: 1.4 = Exposure C\$ + 1 or rather the Exposure C\$ = .4

First, thanks for responding: ok. Here’s where I am confused. We have a UK investor. We have a Canadian stock. We have the formula: domestic currency exposure of an asset = foreign currency exposure +1 --------- My questions: 1) I knows this sounds really lame, but who/what is the domestic exposure? 2) Who/what is the the foreign currency exposure 3) Who/what is the “local” currency exposure?

i would be so grateful if someone could help me with this

Alright, I understand. Sorry for the drama. Basically: domestic currency exposure of an asset = foreign currency exposure +1 1.4 = local exposure + 1 local exposure = .4 there you have it