PPP and Exposure Layton Co., a U.S. firm, attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters:
where SP represents the percentage change in Layton’s stock price per quarter, represents the percentage change in the yen’s value per quarter, and is an error term. Based on the analysis, the coefficient is 0, and the coefficient is 0.4 and is statistically significant. Layton believes that the inflation differential has a major effect on the value of the yen (based on purchasing power parity). Inflation in Japan is expected to rise substantially in the next quarter, whereas U.S. inflation will remain at a low level. Would you expect Layton’s value to be favorably affected, unfavorably affected, or not affected by its economic exposure over the next quarter? Explain.
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