Tried searching this topic, but with no luck. Does anyone have a clever way of deciphering from a given word problem whether or not you need to add 1 to the given gamma (regression coefficient)? This sh1t is confusing. Thanks
If you are an investor from country X, then add 1 to country X’s gamma. EX: You are a US investor investing in a Japanese firm. Add 1 to USD gamma.
Ok. So why in EOC question #15 of CFIA text reading 68 are they adding 1 to the Aussie gamma when you are a US investor?
Simple concept here: gamma = gamma(LC) + 1 This is interpreted (in the same order) as: Sensitivity of foreign currency denominated investments to change in foreign currency = sensitivity of underlying security value to change in FC + exposure to foreign currency Example: Returns on Japanese exporters are negatively correlated to currency appreciation (they are able to export more when the Yen is weaker). For every 1% that the Yen weakens, the Japanese exporters stock prices go up by .5%. Using the above formula: 0.5 = -0.5 + 1 You can interpret the above as the yen appreciates by 1%, then you will gain 1% from the currency and lose 0.5% on the investment (because the company will export less and the stock will decline) Example 2: Lets look at the same exporter, but assume they are very levered, and a 1% weaker Yen increases their stock price by 10%. Using the above formula: -9 = -10 + 1 You can interpret the above as a 1% appreciation in the Yen will make you 1% on the currency, but the underlying stock will decline by 10%, for a total loss of 9%. Cheers
TheGrizz Wrote: ------------------------------------------------------- > Ok. So why in EOC question #15 of CFIA text > reading 68 are they adding 1 to the Aussie gamma > when you are a US investor? The answer to your specific question is this: The regression was done on the exchange rate of USD:AUD. So, the Gamma you are given is obviously Gamma(LC). So you add 1 to the regression Gamma of -0.5 = +0.5 If the regression was run only on the AUD movements, you wouldn’t need to add 1. Hope this helps.
In regards to your jap exporter example… if they currency reacts wtih .5 appreciation in stock price to a 1% decr of the yen…shouldnt the gamma be: LC=+.5 +1 + 1.5 and not LC= -.5 + 1 = .5 thx