Exchange Rate Risk - Schweser Book 1, Exam 2

Q22 on PM section.

Haikuka International, a Japanese electronic firm. Analysts have regressed historical returns of the HI stock with changes in value of the yen. When HI returns are measured in YEN, the resulting intercept and slope are +0.15 and -0.20. When returns are measured in USD, the intercept and slope is +0.15 and +0.80.

Determine type of exchange rate risk exposure the Haikuka hedged using currency futures

A) Economic Exposure

B) Translation Exposure

C) Transaction Exposure

The the answer is C. How is this determined? I would have thought it was economic exposure given the data they give on regression analysis. I’d agree that Transaction Exposure is definitely the “most” likely to be hedged using futures, but why is this a certainty. Is the regression data given just a red herring in this case?

Wow… they have total ****** up when they edited this item set from 2013 to 2014. This is what the question said last year:

"Three months after proposing the international diversification plan, Garrison was able to persuage Point university to make a direct short temr investmetn of $2 million in HI, a Japanese electronics firm. HI exports its products primarily to the US and Europe, selling only 30% of its production in Japan. IN order to control the costs of its production inputs HI uses currency futures to mitgate exchange rate fluctuations associated with contractual gold purchases from Australia. In its current contract, HI has one remaining purchase of Australian gold that will occur in nine months. THe company has hedged the purchase with a long 12-month futures contract on the AUD.

that correlation data is used for the MVHR calculation in another question. The Beta in the regression is the MVHR.

Thanks for clarifying that up. I was going insane trying to find some logic to there reasoning.