Currency sensitivity question - I'm lost question, suddenly, currency, exchange, against

JGovender

Question from Schweser sample exams, told from point of view of a UK investor
Sensitivity of Slapshot (the Canadian stock) to changes in the Pound/Canadian $ exchange rate = 1.4.
Suppose the C$ suddenly depreciates by 10% against the Pound. What is most likely to happen to the C$ value of Slapshot in response to this sudden exchange rate change?
A) local currency value will fall 10%
B) local currency value will fall 4%
C) local currency would be unchanged
The answer is B
I’m totally lost on this material
Here’s the explanation: The sensitivity is a function of the CAD reaction, specifically the sensitivity of the currency return is equal to y(CAD) + 1. Since y = 1.4, y(CAD) must be .4

mdfb79

Alright, I understand. Sorry for the drama.
Basically:
domestic currency exposure of an asset = foreign currency exposure +1
1.4 = local exposure + 1
local exposure = .4
there you have it

AnalystAlan

i would be so grateful if someone could help me with this

morebeans

First, thanks for responding:
ok. Here’s where I am confused.
We have a UK investor.
We have a Canadian stock.
We have the formula: domestic currency exposure of an asset = foreign currency exposure +1
———
My questions:
1) I knows this sounds really lame, but who/what is the domestic exposure?
2) Who/what is the the foreign currency exposure
3) Who/what is the “local” currency exposure?

LorrinCFA

Currency exposure is in the ICAPM reading.
Specifiacally:
domestic currency exposure of an asset = foreign currency exposure +1
since the domestic currency exposure is 1.4 (point of view of UK investor) and we are looking for the foreign currency exposure (exposure of C$) then:
1.4 = Exposure C$ + 1 or rather the Exposure C$ = .4