FCRP and the LC... Some day I might understand this

CFA Level II
#1

Question for clarification: A currency can only be considered a LC (and thus need a +1 added to its “Y”) if it is the local currency of the country you reside in? Correct? IE: For a US investor the LC is the USD, for a French investor it’s the Euro. Thus if I’m a US investor using ICAPM to evaluate securities in France the only possible LC could be the USD… is this accurate?

#2

In this case, you may consider USD as a domestic currency. Local currency is like foreign curreny.

#3

I don’t understand… when do I add the +1 and when don’t I? Half the questions I do you add it, half you don’t.

#4

in the icapm, the “y” = sensitity to fcrp = yd = ylc +1

#5

This is the way I understand it. Let’s say, you (a US investor) invest in Sony’s stock in Japan’s market, your currency exposure is y(USD)=y(YEN)+1. Your gain in USD has two parts: 1) For every 1% appreciation in Yen, you gain 1% (you purchase Yen first to invest in Japan’s market); 2) For every 1% appreciation in Yen, Sony may gain/loss in Yen: y(YEN)%. Overall, your return’s change is: y(USD)=y(YEN)+1, which can also be explained with: R(USD)=R(YEN)+%ChangeOfYEN.