Gamma Q

CFA Level II
#1

Do I have this right? A. Positive Gamma = Wal Mart (Company with Majority Imports, profit goes up when domestic currency weakens) B. Negative Gamma = GM (Company with Majority Exports, profit goes down when domestic currency weakens)

#2

What? You’re kidding, right? You must be…tell me you’re kidding, please.

#3

this guy

#4

Yes - Positive gamma from the US company viewpoint - local currency appreciates, imports become cheaper, your return goes up. Negative gamma from the US company viewpoint - local currency appreciates, exports become less attractive, your return goes down.

#5

I kind of found it, SS18 . . . sorry I might have tied two concepts together in my mind . . . ? It says “Gamma A LC” - How Correlations between Asset Returns and Changes in Exchange Rates Affect LC Exposure: o A zero correlation means that an asset’s local currency price will have no systematic relation to a change in the DC/LC exchange rate. In this case, the value of the local currency exposure (γA LC, DC/LC) will be zero. o A positive correlation means that an asset’s local currency price will change in the same direction as any change in the DC/LC exchange rate. In this case, the value of the local currency exposure (γA LC, DC/LC) will have a positive value. o A negative correlation means that an asset’s local currency price will change in the opposite direction as any change in the DC/LC exchange rate. In this case, the value of the local currency exposure (γA LC, DC/LC) will have a negative value. - Why Assets Have Currency Exposure, several causal factors: o Only Real Exchange Movements Affect Asset Valuations o The Type of Activity in Which a Company is Engaged  The valuation of companies that earn significant revenues in foreign markets but have largely domestic costs (such as GM) tend to be negatively correlated with movements in the real values of their local currencies. Their earnings tend to do well when their local currencies depreciate relative to other countries.  The valuations of companies whose costs are largely borne in foreign currencies but whose sales are largely domestic (such as Wal-Mart) tend to be positively correlated with movements in the real values of their local currencies in the international currency markets. These companies tend to do well when the local currency appreciates against other countries.

#6

γ = gamma symbol above

#7

sebrock Wrote: ------------------------------------------------------- > Yes - > > Positive gamma from the US company viewpoint - > local currency appreciates, imports become > cheaper, your return goes up. > > Negative gamma from the US company viewpoint - > local currency appreciates, exports become less > attractive, your return goes down. oh ok thanks . . . so I should have written “strengthens” : A. Positive Gamma = Wal Mart (Company with Majority Imports, profit goes up when domestic currency strengthens) B. Negative Gamma = GM (Company with Majority Exports, profit goes down when domestic currency strengthens)