IFE and Exposure Maine Co., a U.S. firm, measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters:
where SP represents the percentage change in Maine’s stock price per quarter, represents the percentage change in the British pound’s value per quarter, and is an error term. Based on the analysis, the coefficient is estimated to be 0, and the , coefficient is estimated to be 0.3 and is statistically significant. Maine Co. believes that the movement in the value of the pound over the next quarter will be mostly driven by the international Fisher effect. The prevailing quarterly interest rate in the United Kingdom is lower than the prevailing quarterly interest rate in the United States. Would you expect that Maine’s value to be favorably affected, unfavorably affected, or not affected by the pound’s movement over the next quarter? Explain.
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