1. Use the data from the file economic risk attached to answer the following: a.

Question

1. Use the data from the file economic risk attached to answer the following:

a. How does a 1% change in the exchange rate for the Brazilian real affect the price of the stock?

b. Is the relationship between the changes in the value of the real and returns on the stock statistically significant? Explain how you determine this.

c. If an investor owning stock in the company were to hedge the real related risk of the stock perfectly, how much lower would the risk of the investment be? (That is, how much lower would the volatility of the stock be after hedging real related risk?)

d. When the value of the real increases, how does the stock price change?

If the value of the real increases, the stock price increases.

Date Stock price USD/BRL 6/29/18 0.20 3.9714 6/28/18 0.25 3.972 6/27/18 0.25 3.9706 6/26/18 0.25 3.9678 6/25/18 0.23 3.9643 6/22/18 0.31 3.9675 6/21/18 0.21 3.9767 6/20/18 0.22 3.9689 6/19/18 0.21 3.9723 6/18/18 0.21 3.9557 6/15/18 0.34 3.9661 6/14/18 0.30 3.9661 6/13/18 0.34 3.9631 6/12/18 0.34 3.9634 6/11/18 0.34 3.9567 6/8/18 0.30 3.9665 6/7/18 0.29 3.9656 6/6/18 0.29 3.9578 6/5/18 0.29 3.9635 6/4/18 0.30 3.9608 6/1/18 0.35 3.9659 5/31/18 0.40 3.9658 5/30/18 0.35 3.9758 5/29/18 0.35 3.9742 5/25/18 0.27 3.9708 5/24/18 0.29 3.9672 5/23/18 0.15 3.9757 5/22/18 0.15 3.9697 5/21/18 0.20 3.9626 5/18/18 0.20 3.9667 5/17/18 0.12 3.9834 5/16/18 0.14 3.9818 5/15/18 0.14 3.9792 5/14/18 0.14 3.9915 5/11/18 0.16 3.9744 5/10/18 0.20 3.9649 5/9/18 0.20 3.9859 5/8/18 0.21 3.9991 5/7/18 0.19 4.0067 5/4/18 0.22 3.989 5/3/18 0.16 3.9987 5/2/18 0.24 3.978 5/1/18 0.24 4.0045 4/30/18 0.24 4 4/27/18 0.21 4.0124 4/26/18 0.25 4.016 4/25/18 0.29 4.017 4/24/18 0.29 4.0182 4/23/18 0.21 4.0008 4/20/18 0.21 3.9961 4/19/18 0.32 4.0364 4/18/18 0.31 4.035 4/17/18 0.29 4.0179 4/16/18 0.29 3.9969 4/13/18 0.26 4.0107 4/12/18 0.30 4.0096 4/11/18 0.29 4.0026 4/10/18 0.20 3.9978 4/9/18 0.20 3.9961 4/6/18 0.22 3.9794 4/5/18 0.22 3.9594 4/4/18 0.24 3.9277 4/3/18 0.25 3.9198 4/2/18 0.25 3.9109 3/29/18 0.25 3.9073 3/28/18 0.23 3.9225 3/27/18 0.20 3.9373 3/26/18 0.20 3.909 3/23/18 0.30 3.8725 3/22/18 0.26 3.8597 3/21/18 0.26 3.8528 3/20/18 0.28 3.8525 3/19/18 0.29 3.8418 3/16/18 0.37 3.8168 3/15/18 0.35 3.8121 3/14/18 0.35 3.8205 3/13/18 0.26 3.8298 3/12/18 0.26 3.8278 3/9/18 0.30 3.8202 3/8/18 0.40 3.8308 3/7/18 0.42 3.8017 3/6/18 0.42 3.8009 3/5/18 0.40 3.7898 3/2/18 0.40 3.7927 3/1/18 0.40 3.7878 2/28/18 0.40 3.7799 2/27/18 0.40 3.7818 2/26/18 0.40 3.775 2/23/18 0.40 3.7797 2/22/18 0.42 3.7737 2/21/18 0.42 3.7579 2/20/18 0.42 3.7607 2/16/18 0.45 3.7689 2/15/18 0.47 3.7579 2/14/18 0.40 3.7545 2/13/18 0.35 3.7699 2/12/18 0.35 3.7656 2/9/18 0.30 3.7657 2/8/18 0.15 3.7625 2/7/18 0.35 3.7557 2/6/18 0.38 3.7433 2/5/18 0.37 3.7584 2/2/18 0.35 3.7702 2/1/18 0.36 3.7821 1/31/18 0.45 3.779 1/30/18 0.37 3.7757 1/29/18 0.32 3.7685 1/26/18 0.27 3.7697 1/25/18 0.37 3.7484 1/24/18 0.35 3.738 1/23/18 0.32 3.7332 1/22/18 0.35 3.7134 1/19/18 0.35 3.7036 1/18/18 0.35 3.6953 1/17/18 0.35 3.6915 1/16/18 0.33 3.7014 1/12/18 0.32 3.7043 1/11/18 0.30 3.6934 1/10/18 0.30 3.678 1/9/18 0.30 3.6897 1/8/18 0.31 3.6801 1/5/18 0.30 3.6823 1/4/18 0.44 3.6657 1/3/18 0.44 3.6793 1/2/18 0.44 3.6798 12/29/17 0.50 3.6845 12/28/17 0.46 3.6759 12/27/17 0.46 3.6945 12/26/17 0.45 3.6885 12/22/17 0.45 3.6849 12/21/17 0.45 3.6927 12/20/17 0.45 3.6955 12/19/17 0.45 3.6837 12/18/17 0.45 3.6701 12/15/17 0.45 3.6736 12/14/17 0.45 3.6627 12/13/17 0.44 3.6734 12/12/17 0.42 3.6732 12/11/17 0.45 3.6591 12/8/17 0.45 3.6606 12/7/17 0.50 3.658 12/6/17 0.45 3.6563 12/5/17 0.45 3.6501 12/4/17 0.45 3.6454 12/1/17 0.45 3.6317 11/30/17 0.46 3.6412 11/29/17 0.45 3.6456 11/28/17 0.48 3.6385 11/27/17 0.50 3.6212 11/24/17 0.50 3.6134 11/22/17 0.52 3.6128 11/21/17 0.52 3.612 11/20/17 0.59 3.6107 11/17/17 0.52 3.6177 11/16/17 0.51 3.6178 11/15/17 0.51 3.6232 11/14/17 0.45 3.6243 11/13/17 0.40 3.6241 11/10/17 0.40 3.614 11/9/17 0.40 3.6081 11/8/17 0.45 3.608 11/7/17 0.41 3.6164 11/6/17 0.38 3.6174 11/3/17 0.40 3.6221 11/2/17 0.45 3.6027 11/1/17 0.45 3.6135 10/31/17 0.52 3.6079 10/30/17 0.55 3.6139 10/27/17 0.52 3.6003 10/26/17 0.54 3.6128 10/25/17 0.57 3.6113 10/24/17 0.52 3.6076 10/23/17 0.52 3.6044 10/20/17 0.52 3.6035 10/19/17 0.54 3.6114 10/18/17 0.51 3.5946 10/17/17 0.55 3.6077 10/16/17 0.55 3.6119 10/13/17 0.50 3.5987 10/12/17 0.58 3.5777 10/11/17 0.60 3.5855 10/10/17 0.60 3.5967 10/9/17 0.59 3.5957 10/6/17 0.50 3.5923 10/5/17 0.65 3.5898 10/4/17 0.60 3.5882 10/3/17 0.60 3.582 10/2/17 0.62 3.6009 9/29/17 0.65 3.6051 9/28/17 0.65 3.6085 9/27/17 0.58 3.6043 9/26/17 0.65 3.5979 9/25/17 0.62 3.599 9/22/17 0.59 3.5972 9/21/17 0.50 3.6005 9/20/17 0.55 3.6093 9/19/17 0.55 3.5979 9/18/17 0.52 3.6041 9/15/17 0.59 3.5912 9/14/17 0.59 3.5863 9/13/17 0.55 3.5795 9/12/17 0.60 3.5842 9/11/17 0.60 3.5887 9/8/17 0.60 3.5845 9/7/17 0.50 3.5982 9/6/17 0.55 3.5975 9/5/17 0.61 3.5985 9/1/17 0.67 3.5983 8/31/17 0.68 3.5918 8/30/17 0.50 3.5763 8/29/17 0.60 3.5829 8/28/17 0.69 3.5795 8/25/17 0.65 3.5691 8/24/17 0.71 3.5749 8/23/17 0.66 3.5714 8/22/17 0.60 3.5589 8/21/17 0.60 3.5613 8/18/17 0.50 3.5592 8/17/17 0.50 3.5598 8/16/17 0.50 3.5519 8/15/17 0.50 3.5409 8/14/17 0.43 3.5591 8/11/17 0.50 3.5651 8/10/17 0.50 3.5548 8/9/17 0.48 3.5587 8/8/17 0.48 3.5527 8/7/17 0.39 3.5511 8/4/17 0.48 3.547 8/3/17 0.50 3.5321 8/2/17 0.50 3.5428 8/1/17 0.50 3.5391 7/31/17 0.50 3.5399 7/28/17 0.49 3.5245 7/27/17 0.41 3.531 7/26/17 0.50 3.5234 7/25/17 0.50 3.5362 7/24/17 0.50 3.5335 7/21/17 0.41 3.5232 7/20/17 0.41 3.5287 7/19/17 0.51 3.5337 7/18/17 0.60 3.529 7/17/17 0.60 3.5281 7/14/17 0.60 3.5368 7/13/17 0.60 3.5404 7/12/17 0.64 3.5373 7/11/17 0.60 3.54 7/10/17 0.60 3.5374 7/7/17 0.60 3.5458 7/6/17 0.60 3.5323 7/5/17 0.60 3.5273 7/3/17 0.65 3.5266

Explanation / Answer

Answer )

The question is based on the realtion between change Stock price and exchnage rate ( real ) with given data,

The said relation ship between two given variables be established by use of regression model ,

Y = a+ bX ------(1)

Y = change in stock , X= change in real

Working on data ,

Ans b)

The 1% change in real impact on stock ,

As per regression data, and equation 1 above,

Y = a + b X

Y = 0.0110 + (-8.9765) X = 0.0110 + (-8.9765) * 1%

Y = -8.9655 % change in stock

Ans b) The relationship between the changes in the value of the real and returns on the stock is statistically significant, the same can be explained with use of P-value stat shown in output of regression in above table . The P value should be less than equal to 0.05 , the calculated value of P i.e.0.0159 support the result of significance.

Ans C)

The volatilty is measured by calculation of Standard Deviation ,

Standard Deviation for Stock = 15.9% and Standard Deviation for real = 0.3%

Standard Deviation for Stock after hedge = 15.9 - 0.3 = 15.6%.

Benefit of hedge = 0.3% .

Ans D)

The relation between real and stock price is negative , it means increase in real will cause decrease in stock price , by use of equation below

Y = a + b X

Y = 0.0110 + (-8.9765) X = 0.0110 + (-8.9765) * 1%

Y = -8.9655 %.

Date Stock price Change in stock USD/BRL Change in Exchange 6/29/2018 0.2 -20.0% 3.9714 0.0% correlation -0.032643211 6/28/2018 0.25 0.0% 3.972 0.0% 6/27/2018 0.25 0.0% 3.9706 0.1% Regression summary OUTPUT 6/26/2018 0.25 8.7% 3.9678 0.1% 6/25/2018 0.23 -25.8% 3.9643 -0.1% Regression Statistics 6/22/2018 0.31 47.6% 3.9675 -0.2% Multiple R 0.152366621 6/21/2018 0.21 -4.5% 3.9767 0.2% R Square 0.023215587 6/20/2018 0.22 4.8% 3.9689 -0.1% Adjusted R Square 0.01927694 6/19/2018 0.21 0.0% 3.9723 0.4% Standard Error 0.157389323 6/18/2018 0.21 -38.2% 3.9557 -0.3% Observations 250 6/15/2018 0.34 13.3% 3.9661 0.0% 6/14/2018 0.3 -11.8% 3.9661 0.1% ANOVA 6/13/2018 0.34 0.0% 3.9631 0.0% df SS MS F Significance F 6/12/2018 0.34 0.0% 3.9634 0.2% Regression 1 0.14601019 0.14601019 5.89430539 0.015902345 6/11/2018 0.34 13.3% 3.9567 -0.2% Residual 248 6.143306919 0.024771399 6/8/2018 0.3 3.4% 3.9665 0.0% Total 249 6.289317109 6/7/2018 0.29 0.0% 3.9656 0.2% 6/6/2018 0.29 0.0% 3.9578 -0.1% Coefficients Standard Error t Stat P-value 6/5/2018 0.29 -3.3% 3.9635 0.1% Intercept 0.0110 0.010110413 1.091783958 6/4/2018 0.3 -14.3% 3.9608 -0.1% X Variable 1 -8.9765 3.697330908 -2.42781906 0.015902345 6/1/2018 0.35 3.9659 7/13/2017 0.6 -6.3% 3.5404 0.1% 7/12/2017 0.64 6.7% 3.5373 -0.1% 7/11/2017 0.6 0.0% 3.54 0.1% 7/10/2017 0.6 0.0% 3.5374 -0.2% 7/7/2017 0.6 0.0% 3.5458 0.4% 7/6/2017 0.6 0.0% 3.5323 0.1% 7/5/2017 0.6 -7.7% 3.5273 0.0% 7/3/2017 0.65 #DIV/0! 3.5266 #DIV/0! Standard Deviation 15.9% 0.3%

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