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    LC To DC Sensitivity GammaLC

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    cfalevel1
    This document discusses currency exposures when evaluating international assets. It explains that currency exposures, like betas, relate foreign currency risk premiums to returns. An asset's currency exposure indicates its sensitivity to changes in the local currency from the local perspective and must be converted to the domestic perspective. The correlation between changes in the local currency and asset returns from the local perspective determines how the asset's return is affected when considering both currency movements and risk premiums.

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    LC To DC Sensitivity GammaLC

    Uploaded by

    cfalevel1
    16 views2 pages
    This document discusses currency exposures when evaluating international assets. It explains that currency exposures, like betas, relate foreign currency risk premiums to returns. An asset's currency exposure indicates its sensitivity to changes in the local currency from the local perspective and must be converted to the domestic perspective. The correlation between changes in the local currency and asset returns from the local perspective determines how the asset's return is affected when considering both currency movements and risk premiums.

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    LC to DC Sensitivity GammaLC

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    This document discusses currency exposures when evaluating international assets. It explains that currency exposures, like betas, relate foreign currency risk premiums to returns. An asset's currency exposure indicates its sensitivity to changes in the local currency from the local perspective and must be converted to the domestic perspective. The correlation between changes in the local currency and asset returns from the local perspective determines how the asset's return is affected when considering both currency movements and risk premiums.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as doc, pdf, or txt
    16 views2 pages

    LC To DC Sensitivity GammaLC

    Uploaded by

    cfalevel1
    This document discusses currency exposures when evaluating international assets. It explains that currency exposures, like betas, relate foreign currency risk premiums to returns. An asset's currency exposure indicates its sensitivity to changes in the local currency from the local perspective and must be converted to the domestic perspective. The correlation between changes in the local currency and asset returns from the local perspective determines how the asset's return is affected when considering both currency movements and risk premiums.

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    Portfolio Management

    International Asset Pricing

    Asset Currency Exposures


    World n
    Currency = ∑ Gi,k SRPk
    Re turn i,k =1

    The currency exposures (gammas) are:


    • Like β’s, except that they relate to foreign currency risk
    premiums rather than market risk premiums.
    • The sensitivity of asset returns to changes in LC:
    Currency % Change in LC asset price
    exposure GLC
    i,k =
    from LC %ΔLC
    perspective
    • An asset’s currency exposure is local currency based
    and must be converted to domestic currency perspective.
    Portfolio Management
    International Asset Pricing

    Asset Currency Exposures

    Correlation
    from LC LC Change in
    Perspective Currency Asset rDC GLC G

    Negative
    Correlation ↓ 1.5% ↑1.5% 0% -1 +1= 0

    Positive
    Correlation ↓ 1.5% ↓1.5% - 3.0% 1 2

    No
    Correlation ↓ 1.5% 0% - 1.5% 0 1

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