Measuring Economic Exposure Bag Company, a U.S. firm, has a business of offering cruises along the coast of Argentina that are solely geared toward American tourists. The company charges American tourists in U.S. dollars, but all of its expenses, such as payments to its employees, are in Argentine pesos. You want to measure Bag’s economic exposure to movements in the peso by applying regression analysis to data over the last 60 quarters: SP = b 0 + b 1 e + μ where SP represents the percentage change in Bag’s stock price per quarter, e represents the percentage change in the Argentine peso’s value per quarter, μ is an error term, and b 0 and b 1 are regression coefficients. Do you think the expected sign of the b , coefficient in the model will be positive and significant, negative and significant, or zero (not significant)? Briefly explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 10, Problem 49QA
Textbook Problem

Measuring Economic Exposure Bag Company, a U.S. firm, has a business of offering cruises along the coast of Argentina that are solely geared toward American tourists. The company charges American tourists in U.S. dollars, but all of its expenses, such as payments to its employees, are in Argentine pesos. You want to measure Bag’s economic exposure to movements in the peso by applying regression analysis to data over the last 60 quarters:

SP = b 0 + b 1 e + μ

where SP represents the percentage change in Bag’s stock price per quarter, e represents the percentage change in the Argentine peso’s value per quarter, μ is an error term, and b 0 and b 1 are regression coefficients. Do you think the expected sign of the b , coefficient in the model will be positive and significant, negative and significant, or zero (not significant)? Briefly explain.

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