International Asset Pricing - Domestic currency exposure (ICAPM)

Hi All

I’m a bit confused when we have to add 1 to the local currency (LC) when calculating ICAPM?

For eg in CFAI EOC Reading 62 Question 13A:

  • When calculating the re on Stock A why aren’t we adding 1 to the sensitivity to the euro = 1 + 1 = 2?

However in Schweser type questions - refer to Challenge Problems Reading 62 Question 18.

  • here we are infact adding 1 to the currency exposure to euro - 0.25+1 = 0.75

What’s the go, what am i missing? Are we not adding 1 in the CFAI question because it already is 1?

Thanks in advance

So can anybody give me a general rule on when we do add 1?

Thank you

Not sure if you already got the answer.

In the CFA text book question, what you are given is Total gamma which includes local-currency exposure + 1.

In the Schweser question, they have explicitly mentioned gamma(LC), which means the currency exposure to local investors (European investors). Since US investor is investing in Euro, you would add +1. Same thiong for Tokyo.

Hope you got this.