Currency Exposures

Summaries

Traditional Model:

Currency depreciates => in long run, stimulate economic activities => stock price increases, so this is –ve domestic currency exposure

(For short run, it is opposite because the imports are more expensive. So, there is a so-called J-curve plotting net export vs time)

Money Demand Model:

Increase economic activities => GDP increases and demand of domestic currency increases => currency appreciates (+ve domestic currency exposure)

Free Market Theory

Increase in interest rate => currency appreciates and bond price reduces, -ve domestic currency exposure

Government Intervention Theory

Currency depreciates => increase interest rate =>bond price decreases, so +ve domestic currency exposure