traditional model

When the FC (foreign currency) changes by 10%, the value of the exporter (a foreign company) stock generally change by 6%. The exporter does not import its inputs but obtains them locally.

[Question]
The sensitivity of the exporter stock returns, measured in DC (domestic currency) to changes in the value of the FC is:

Traditional model

FC			Exporter stock price
↑(appreciation) 10%			-6%
↓(depreciation) -10%			+6%

The exporter's local currency (FC) exposure is thus negative and is -0.60.

Using the formula for the domestic currency exposure, the sensitivity of the exporter stock returns in DC terms to changes in the value of the FC is:

γ = γ(LC) + 1
= (-0.60) + 1 = 0.40

γ: DC sensitivity
γ(LC): LC (local currency) sensitivity


(opposite) money demand model