# ICAPM

How do you solve for gamma, or is this given? Will it just say gamma = x??? Also RFR is based on interest rate in home country and Beta and MRP are both based on global markets??

its pretty tricky. there are 2 kinds of Gammas, one is regarding local return vs currency exchange rate, it is the Y_LC. the gamas used in ICAPM is for domestic return vs currency exchange. gamma in ICAPM = Y_LC+1

Yes to all questions (with the LC +1 trick if required).

I only ask becuase on the MOCK CFA exam I don’t remember them giving gamma…

You won’t be asked to calculate gamma. Know what it is, and what it means when gamma is large or small.

If I’m asked to calculate Gamma I’m just gonna circle b!

US firm with Operations in Europe. If the Euro drops 2% and the stock in the US appreciates by 2%, it has a yFC -1. Thus yDC=1+yFC= 0 (Think importer: benefits from FC depreciation) If the Euro drops 2% and the stock in the US doesn’t react, it has a yFC 0. Thus yDC=1+yFC =1 If the Euro drops by 2% and the stock int he US depreciates by 2%, it has a yFC 1. Thus yDC=1+yFC= 2 (Think importer: harmed by FC depreciation)

Except that the +1 would be added to the EUR only if the LC was the EUR. It’s a US firm with USD-based equity, and the +1 would be to the USD.

In the answer to one of the parts was that the return to a U.S. Investor holding a U.K. bond was: Return of U.K Bond + Return of U.K. Currency + (Return U.K. Bond X Return U.K. Currency) I am confused on why the two are multiplied together…

mbolzicco Wrote: ------------------------------------------------------- > US firm with Operations in Europe. > > If the Euro drops 2% and the stock in the US > appreciates by 2%, it has a yFC -1. Thus > yDC=1+yFC= 0 (Think importer: benefits from FC > depreciation) > > If the Euro drops 2% and the stock in the US > doesn’t react, it has a yFC 0. Thus yDC=1+yFC =1 > > If the Euro drops by 2% and the stock int he US > depreciates by 2%, it has a yFC 1. Thus > yDC=1+yFC= 2 (Think importer: harmed by FC > depreciation) I am trying to confirm this…