Hi, Please can someone define the differences between: a) DOMESTIC currency sensitivity, gamma b) LOCAL currency sensitivity, gamma (LC) The fact that ‘DOMESTIC = LOCAL’ by definition is kinda confusing me. Thanks and Happy New Year!
Happy New Year to you all. Gamma (domestic) = Gamma (LC) +1 Domestic is the currency of the investor. Local is the foreign currency (of the company the investor invests in).
The Gamma (LC) is the sensitivity of the investment return in local foreign currency to exchange rate movements. The Gamma (domestic) would then be the sensitivity of the investment return in local domestic currency to exchange rate movements.
…as you probably figured out DOMESTIC and LOCAL are not the same definition but a wise instructor once tackled this very issue and he said to think of FOREIGN as the LOCAL YOKOS (Not sure what a Local Yoko is but it certainly sounds foreign to ME).