Anyone can explain the difference between the 2? Is it correct to say that the local exposure is the change in an asset’s value denominated in the local currency with changes in the exchange rate while domestic exposure is the change in an asset’s value denominated in the domestic currency with changes in the exchange rate??
This will also help you understand ICAPM: Demystifying the ICAPM Model Part1: http://www.youtube.com/watch?v=O2f9LomBc9k&feature=related Part 2: http://www.youtube.com/watch?v=cmD1ZLCOK5U&feature=related They are 10 mins each
thank you my AF colleagues.
Thanks a lot!!!
idreesz - I watched the 2 videos, they are good!!! But there is something that I do not understand, around the 4min 30sec part for the 2nd video, it is mentioned that CFAI can try to be sneaky and give you a gamma that is negative then try to get you to add 1 to it. What is wrong with adding the 1 to it?? Any idea??
no problem in adding 1 to a neg. number. It would only mean that the currency exposure is partly hedged by the stocks negative exposure to the LC
So the negative would mean there is a negative correlation between the stock and the LC?
Yea, if there is a positive correlation ,such as for importers, it would be positive
Say the company is an exporter , they have -0.20 exposure to the LC If the company is an importer , they might have a 0.20 exposure to the LC. So the net LC exposure is 0.8 for the exporter and 1.2 for the importer. i.e. any adverse currency movement in the LC is magnified for the importer and reduced for the exporter