You are a U.S. investor who is considering investments in the Australian stock market, but...
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You are a U.S. investor who is considering investments in the Australian stock market, but you worry about currency risk. You run a regression of the returns on the Australian stock index (in A$) on movements in the Australian dollar exchange rate (U.S.$ per A$) and find a slope of -0.5.
a. What is your currency exposure if you invest in a diversified portfolio of Australian stocks?
b. You invest $10 million in the diversified portfolio, but you fear that the Australian dollar will depreciate by 10 percent relative to the U.S. dollar. How much do you expect to lose because of the currency movement?
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