Question

This is the third time I've posted this... please answer it.

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?

Here is the info you need to answer the quetions:

Date	Stock price	USD/BRL
6/29/2018	0.20	3.9742
6/28/2018	0.25	3.9729
6/27/2018	0.25	3.9732
6/26/2018	0.25	3.9674
6/25/2018	0.23	3.9622
6/22/2018	0.31	3.9692
6/21/2018	0.21	3.9775
6/20/2018	0.22	3.9656
6/19/2018	0.21	3.9601
6/18/2018	0.21	3.9729
6/15/2018	0.34	3.9659
6/14/2018	0.30	3.9683
6/13/2018	0.34	3.9544
6/12/2018	0.34	3.9642
6/11/2018	0.34	3.9637
6/8/2018	0.30	3.9626
6/7/2018	0.29	3.9692
6/6/2018	0.29	3.974
6/5/2018	0.29	3.9746
6/4/2018	0.30	3.9637
6/1/2018	0.35	3.9691
5/31/2018	0.40	3.9557
5/30/2018	0.35	3.9689
5/29/2018	0.35	3.9655
5/25/2018	0.27	3.9784
5/24/2018	0.29	3.9719
5/23/2018	0.15	3.9806
5/22/2018	0.15	3.9684
5/21/2018	0.20	3.9657
5/18/2018	0.20	3.9696
5/17/2018	0.12	3.9888
5/16/2018	0.14	3.9818
5/15/2018	0.14	3.9788
5/14/2018	0.14	3.9842
5/11/2018	0.16	3.9602
5/10/2018	0.20	3.9664
5/9/2018	0.20	3.9871
5/8/2018	0.21	4.0172
5/7/2018	0.19	4.0132
5/4/2018	0.22	3.9843
5/3/2018	0.16	3.996
5/2/2018	0.24	3.9686
5/1/2018	0.24	4.0009
4/30/2018	0.24	4.0153
4/27/2018	0.21	4.023
4/26/2018	0.25	4.0131
4/25/2018	0.29	4.0189
4/24/2018	0.29	4.0083
4/23/2018	0.21	4.0012
4/20/2018	0.21	4.0105
4/19/2018	0.32	4.0209
4/18/2018	0.31	4.0337
4/17/2018	0.29	4.014
4/16/2018	0.29	4.0116
4/13/2018	0.26	4.0126
4/12/2018	0.30	4.0153
4/11/2018	0.29	3.9991
4/10/2018	0.20	4.0006
4/9/2018	0.20	4.0029
4/6/2018	0.22	3.9928
4/5/2018	0.22	3.9716
4/4/2018	0.24	3.9297
4/3/2018	0.25	3.921
4/2/2018	0.25	3.9146
3/29/2018	0.25	3.8996
3/28/2018	0.23	3.9273
3/27/2018	0.20	3.944
3/26/2018	0.20	3.901
3/23/2018	0.30	3.8699
3/22/2018	0.26	3.851
3/21/2018	0.26	3.8451
3/20/2018	0.28	3.8515
3/19/2018	0.29	3.8456
3/16/2018	0.37	3.826
3/15/2018	0.35	3.8154
3/14/2018	0.35	3.8156
3/13/2018	0.26	3.8193
3/12/2018	0.26	3.8152
3/9/2018	0.30	3.8273
3/8/2018	0.40	3.8156
3/7/2018	0.42	3.8078
3/6/2018	0.42	3.8054
3/5/2018	0.40	3.7966
3/2/2018	0.40	3.8027
3/1/2018	0.40	3.7896
2/28/2018	0.40	3.778
2/27/2018	0.40	3.7903
2/26/2018	0.40	3.783
2/23/2018	0.40	3.7788
2/22/2018	0.42	3.7689
2/21/2018	0.42	3.7678
2/20/2018	0.42	3.7573
2/16/2018	0.45	3.756
2/15/2018	0.47	3.7637
2/14/2018	0.40	3.7538
2/13/2018	0.35	3.7684
2/12/2018	0.35	3.755
2/9/2018	0.30	3.7708
2/8/2018	0.15	3.7602
2/7/2018	0.35	3.7559
2/6/2018	0.38	3.7416
2/5/2018	0.37	3.7414
2/2/2018	0.35	3.7612
2/1/2018	0.36	3.7834
1/31/2018	0.45	3.7689
1/30/2018	0.37	3.7682
1/29/2018	0.32	3.7652
1/26/2018	0.27	3.7637
1/25/2018	0.37	3.761
1/24/2018	0.35	3.7447
1/23/2018	0.32	3.7452
1/22/2018	0.35	3.701
1/19/2018	0.35	3.7058
1/18/2018	0.35	3.7083
1/17/2018	0.35	3.6991
1/16/2018	0.33	3.7002
1/12/2018	0.32	3.6999
1/11/2018	0.30	3.6923
1/10/2018	0.30	3.6777
1/9/2018	0.30	3.6823
1/8/2018	0.31	3.6695
1/5/2018	0.30	3.6797
1/4/2018	0.44	3.672
1/3/2018	0.44	3.6827
1/2/2018	0.44	3.6864
12/29/2017	0.50	3.6859
12/28/2017	0.46	3.6857
12/27/2017	0.46	3.6847
12/26/2017	0.45	3.689
12/22/2017	0.45	3.6799
12/21/2017	0.45	3.6853
12/20/2017	0.45	3.6958
12/19/2017	0.45	3.6807
12/18/2017	0.45	3.6817
12/15/2017	0.45	3.6686
12/14/2017	0.45	3.6713
12/13/2017	0.44	3.6794
12/12/2017	0.42	3.6893
12/11/2017	0.45	3.6677
12/8/2017	0.45	3.6541
12/7/2017	0.50	3.6575
12/6/2017	0.45	3.6668
12/5/2017	0.45	3.656
12/4/2017	0.45	3.6443
12/1/2017	0.45	3.6356
11/30/2017	0.46	3.6381
11/29/2017	0.45	3.6435
11/28/2017	0.48	3.6304
11/27/2017	0.50	3.6214
11/24/2017	0.50	3.6244
11/22/2017	0.52	3.6281
11/21/2017	0.52	3.6141
11/20/2017	0.59	3.6236
11/17/2017	0.52	3.6129
11/16/2017	0.51	3.6198
11/15/2017	0.51	3.6203
11/14/2017	0.45	3.6093
11/13/2017	0.40	3.6173
11/10/2017	0.40	3.6208
11/9/2017	0.40	3.6019
11/8/2017	0.45	3.6148
11/7/2017	0.41	3.6199
11/6/2017	0.38	3.6209
11/3/2017	0.40	3.6198
11/2/2017	0.45	3.6078
11/1/2017	0.45	3.6016
10/31/2017	0.52	3.6146
10/30/2017	0.55	3.6024
10/27/2017	0.52	3.6163
10/26/2017	0.54	3.5964
10/25/2017	0.57	3.6004
10/24/2017	0.52	3.6051
10/23/2017	0.52	3.6091
10/20/2017	0.52	3.6037
10/19/2017	0.54	3.5936
10/18/2017	0.51	3.5988
10/17/2017	0.55	3.611
10/16/2017	0.55	3.6113
10/13/2017	0.50	3.5971
10/12/2017	0.58	3.5892
10/11/2017	0.60	3.5969
10/10/2017	0.60	3.5844
10/9/2017	0.59	3.6041
10/6/2017	0.50	3.5925
10/5/2017	0.65	3.5947
10/4/2017	0.60	3.5924
10/3/2017	0.60	3.5929
10/2/2017	0.62	3.5991
9/29/2017	0.65	3.6054
9/28/2017	0.65	3.6096
9/27/2017	0.58	3.5957
9/26/2017	0.65	3.6092
9/25/2017	0.62	3.6046
9/22/2017	0.59	3.6035
9/21/2017	0.50	3.6033
9/20/2017	0.55	3.6096
9/19/2017	0.55	3.6012
9/18/2017	0.52	3.5988
9/15/2017	0.59	3.5954
9/14/2017	0.59	3.5984
9/13/2017	0.55	3.5938
9/12/2017	0.60	3.5849
9/11/2017	0.60	3.5895
9/8/2017	0.60	3.5813
9/7/2017	0.50	3.594
9/6/2017	0.55	3.6055
9/5/2017	0.61	3.5887
9/1/2017	0.67	3.6029
8/31/2017	0.68	3.5862
8/30/2017	0.50	3.5875
8/29/2017	0.60	3.5849
8/28/2017	0.69	3.5784
8/25/2017	0.65	3.5778
8/24/2017	0.71	3.5739
8/23/2017	0.66	3.5681
8/22/2017	0.60	3.5598
8/21/2017	0.60	3.5658
8/18/2017	0.50	3.5528
8/17/2017	0.50	3.5566
8/16/2017	0.50	3.5538
8/15/2017	0.50	3.5435
8/14/2017	0.43	3.5511
8/11/2017	0.50	3.5572
8/10/2017	0.50	3.5547
8/9/2017	0.48	3.5558
8/8/2017	0.48	3.5393
8/7/2017	0.39	3.5331
8/4/2017	0.48	3.5494
8/3/2017	0.50	3.5313
8/2/2017	0.50	3.5422
8/1/2017	0.50	3.548
7/31/2017	0.50	3.529
7/28/2017	0.49	3.5218
7/27/2017	0.41	3.536
7/26/2017	0.50	3.5369
7/25/2017	0.50	3.5377
7/24/2017	0.50	3.5304
7/21/2017	0.41	3.5295
7/20/2017	0.41	3.5254
7/19/2017	0.51	3.5389
7/18/2017	0.60	3.5229
7/17/2017	0.60	3.5337
7/14/2017	0.60	3.5409
7/13/2017	0.60	3.5352
7/12/2017	0.64	3.5463
7/11/2017	0.60	3.5426
7/10/2017	0.60	3.5473
7/7/2017	0.60	3.5387
7/6/2017	0.60	3.5407
7/5/2017	0.60	3.5388
7/3/2017	0.65	3.542

Answer 1

Solution :

We have to find the relation between the stock price and exchange rate (USD/BRL). How the exchnage rate impacts the price of the stock. So, for this purpose we can perform the regression analysis and see the relation.

Regression is performed in the excel and result is as follows

Regression equation

Stock price = intercept + x variable * exchange rate

Stock price = 3.097 - 0.718 * exchange rate

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

Solution: Since the regression equation is

Stock price = 3.097 - 0.718 * exchange rate  

Coefficient associated with exchange rate is -0.718 so 1 point change will change the stock price negatively by 0.718.

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.

Yes, The linear relationship is significant as it can be seen from the significance value which is 0.00<0.05 [ This regression is performed at 95% confidence so if sig value is less than 0.05 then the relation is significant]

R2 value is 0.73, that means 73% of data points are on the regression line

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

When the value of Real increases then USD/BRL will decrease and since regression equation is

Stock price = 3.097 - 0.718 * exchange rate  

So stock price will increase as coefficeint os negative with exchange rate and when Real increases then exchange rate [ USD/BRL] will decrease