International Asset Pricing - Domestic currency exposure (ICAPM)

CFA Level II Portfolio Management
#1

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

#2

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

Thank you

#3

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.

Thanks.