1. the effect of the USD/JPY exchange rate on the value of General Motors (GM).

a. In order to understand whether and how GM has been affected by the USD/JPY exchange rate, we can explore the historical relationship between GM's equity returns (r_GM) and changes in the USD/JPY exchange rate (s_USD/JPY).

For example, we can estimate a simple linear regression model:

where r_GM denotes the changes GM's share price. If GM goes up by 10%, r_GM would equal 10%. Similarly, s_USD/JPY represents the relative change in the USD value of the JPY. Finally, we also include US equity market returns (r_{US_Market}) as well as changes in the USD/DEM (old German mark) exchange rate (s_USD/DEM) [By including these additional terms, we can isolate the effect of the JPY (delta = d), while holding constant the US stock market and other exchange rates.]

Using monthly data between 1973 and 1998, we estimate the following parameters or regression coefficients:

What do these estimates tell you about the impact of an appreciation or depreciation of the JPY (relative to the USD) on GM's value? Provide a qualitative answer as well as a quantitative answer (that is, how much would GM's value change if the JPY appreciated by 10% against the USD holding everything else constant?).

b. Assume that during the 1970s, 80s, and 90s, GM did not do any business in Japan (meaning GM did not sell cars in Japan, nor did GM source parts from Japan).How could GM's (operating) profit have been affected by the USD/JPY exchange rate even without any transactions in JPY? In the mechanism that you describe do you assume that Purchasing Power Parity (PPP) holds or not?

c. Imagine you ran a similar regression using data for the last twenty years, how do you think the sensitivity of GM's stock return to changes in the value of JPY (delta) might have changed and why? There are likely many changes with possibly offsetting effects. Select one and explain how it would have affected the GM's exposure to the JPY.

+ -rGM = a + Brus_Market + SUSD/JPY + Y SUSD/ DEM + -rGM = a + Brus_Market + SUSD/JPY + Y SUSD/ DEM