Running a regression of stock returns against changes in exchange rates

 

Interpret the findings of the regression analysis
Estimate the degree of economic exposure based on the results from the regression analysis
You will do all of the above twice, first using some made-up data provided below; and a second time using an actual MNC you will select.
Instructions
Download the spreadsheet “Economic Exposure”. The file contains the following data over a 61month interval (these are data I made up for Part 1): Economic_Exposure.xlsDownload Economic_Exposure.xls

the stock price of a multinational company,
the value of the European Currency Unit (ECU), quoted $/ECU.
PART 1

Step 1: Use the price series for the company to calculate monthly returns. Note that 61 months of price data will generate 60 months of returns. Similarly, use the ECU series to calculate the monthly percentage changes in the dollar value of the ECU. Show the two series of changes in two separate columns next to the original prices and exchange rates.

Step 2: Regress the return on the company against the percentage changes in the ECU. Stated differently, the return on the company is the dependent (y-axis) variable and the change in the value of the ECU is the independent (x-axis) variable. Report the slope coefficient and its p-value, and the R-squared of the regression. The regression output should be shown in the Excel file.

Step 3: In one Word page, interpret the results as follows:

Provide an interpretation for each of the i) p-value of the estimated slope coefficient, ii) slope coefficient, and iii) R-squared
How does the value of the company change when the dollar depreciates?
How much economic exposure does the company have? Here you reach a conclusion based on your answers to 1 and 2 above.

 

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