Exchange rate exposure – use “IndustryPortfoliosDollar.xlsx” (sources: Fama-French web-site and FRED)

Posted: August 26th, 2021

Student’s Name
Instructor’s Name
Course
Date
Exchange Rate Exposure
N Assignment Solution Points
Exchange rate exposure – use “IndustryPortfoliosDollar.xlsx” (sources: Fama-French web-site and FRED)

Return on a financial investment from t to t+1:
r_(t+1)=p_(t+1)/p_t -1, where p_t is asset price at time t, p_(t+1)is asset price at time t+1.
1.1 What is the correlation between the stock market returns (column N) and the dollar returns (column Q) over
Jan 1990 – Nov 2019 (full sample),
Jan 2008 – Dec 2009 (crisis),
Jan 2010 – Dec 2015 (post-crisis),
Jan 2016 – Nov 2019(recent).
Compare these numbers with each other. Write your thoughts about the recent correlation between the stock market and the dollar.

The full sample (Jan 1990 to Nov. 2019) analysis shows a negative correlation of -0.134 between the two data sets. The Jan 2008 to Dec 2009 (crisis) period displays a negative correation coefficient of – 0.541 while the Jan 2010 to Dec 2015 post crisis period shows a negative correlation of -0.205 between the two sets of data. Lastly, the Jan 2016 to Nov. 2019 correlation shows a negative coefficient of -0.015 between the data sets. Cross-sectional comparison shows that the recent period displayed the weakest negative correlation compared to other period. The market returns and dollar returns were negatively and strongly related during the crisis period at -0.541 than any other period. The post crisis exhibited a moderate negative relationship between the two data sets. 10
1.2 Plot the two cumulative return series (indexes in column M and P) on two different plots and describe the behavior of the U.S. stock prices relative to the dollar in the last 20 years.
What were the periods when the two moved in the same direction?
What were the periods when the two moved in the opposite directions? Q1. The periods when the two indices moved in the same, direction is between 1992 and 1994.
Q2. The period when the two indices moved in opposite direction was between 1996 and 1999 and between 2008 and 2010.

Figure 1: Market and Dollar Index Trend
10
1.3 Industry stock market exposure to the fluctuations in the dollar is a coefficient from regressing stock market returns on the dollar returns.
Mathematically, you can find this exposure coefficient (beta) by applying the following formula:
b= (Cov (IndustryReturn,DollarReturn))/(Var(DollarReturn))
Compute the dollar exposure coefficients for all industries (over 1990-2019) – use data in columns B-K and dollar return in column Q. Input 10 numbers.

Hint 1: the number for the first industry is -0.19. Hint 2: As for using Excel to compute betas, you might find the following video helpful (the third way in the video uses the above formula).

Which industry has the largest and the lowest exposure to the dollar (by absolute value)? How would you interpret these two numbers? 

Hint: You might find this interesting.
Qn. 3, 1
Coefficients
Intercept 0.2262
NoDur 0.0160
Durbl 0.0208
Manuf -0.1335
Enrgy -0.0330
HiTec -0.0096
Telcm -0.0268
Shops 0.0457
Hlth 0.0157
Utils -0.0211
Other 0.0748
Qn 3, 2
Industries with lowest exposure include health, Shops, HiTect and NuDur while those with highest exposure include Manuf and Energy. The numbers can be interpreted by relating to a benchmark of 1. Volatility level reduces when the beta value or coefficient is reduces from 1 and vice versa. Further, a coefficient of higher than one implies higher volatility or exposure. 12