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Question-5: Assume that you wanted to study the impact of the exchange rate changes on the value of a company. Your literature review revealed that
Question-5: Assume that you wanted to study the impact of the exchange rate changes on the value of a company. Your literature review revealed that there are two widely used empirical models for this purpose: R = a, + s +; Original Model used by Adler and Dumas R = a, + B Ry + y +E; Expanded Model introduced by Jurion A. Why academics studying currency exposure felt the need to expand the Adler-Dumas model? What is the market risk factor introduced in the expanded model expected to capture? How do we interpret the exposure coefficients in these models? [Answer] B. The empirical studies using the expanded model generally report small and often insignificant exposure coefficients. Does this mean that a company with an insignificant exposure coefficient has no currency exposure? Explain your answer. [Answer] C. How would you modify the expanded model so that you can capture the accurate exposure rather than residual exposure of a firm? [Answer] Question-5: Assume that you wanted to study the impact of the exchange rate changes on the value of a company. Your literature review revealed that there are two widely used empirical models for this purpose: R = a, + s +; Original Model used by Adler and Dumas R = a, + B Ry + y +E; Expanded Model introduced by Jurion A. Why academics studying currency exposure felt the need to expand the Adler-Dumas model? What is the market risk factor introduced in the expanded model expected to capture? How do we interpret the exposure coefficients in these models? [Answer] B. The empirical studies using the expanded model generally report small and often insignificant exposure coefficients. Does this mean that a company with an insignificant exposure coefficient has no currency exposure? Explain your answer. [Answer] C. How would you modify the expanded model so that you can capture the accurate exposure rather than residual exposure of a firm? [Answer]
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