27 Mar In this assignment, you will work on a project which includes the following: Running a regression of stock returns against changes in exchange rates Interpret the
Task
In this assignment, you will work on a project which includes the following:
- 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.
You will submit one Excel file with the regression data and results and one Word file with the interpretation. However, you may choose to provide your interpretation in the Excel file and submit just one Excel file and no Word file if you prefer. This is Part 1 of the assignment.
PART 2
Now select a Multinational Company that has a least 60 monthly return observations available at finance.yahoo.com and estimate the firm’s level of economic exposure using regression analysis, as in Part 1. Exchange rate information is available at, for example Historical ratesLinks to an external site.
As part of your answer, provide the following information:
- Identify the Multinational Company
- Assess qualitatively the firm’s exposure to exchange rate risk after examination of the firm’s revenue information by geographical segment (for example, from SEC 10-K filings at U.S. SECURITIES AND EXCHANGE COMMISSIONLinks to an external site. and then “Filings”). Use this to briefly explain your choice of currencies to use in the regression analysis.
- Provide and interpret the results of your regression analysis as you did in Part 1. Assess quantitatively the level of economic exposure of the firm relative to movements in the currency or currencies you selected. In your interpretation, follow the structure of Part 1.
- Important: Make sure the dates for exchange rates and stock prices match when you put them both in the same Excel file as in Part 1. Use “adjusted prices” if you get your monthly stock prices from Yahoo FinanceLinks to an external site. (i.e., stock prices adjusted for stock splits)
You will submit one Excel file with the regression data and results and one Word file with the interpretation. However, you may choose to provide your interpretation in the Excel file and submit just one Excel file and no Word file.
The most difficult but also the most important aspect of the assignment is the interpretation. To help you get started, I have some basic ideas here: Regression Analysis get started answer
Actionsdocument (Garcia-Feijoo, 2021). Also, watch the assignment video at the bottom of the Module 9 page.
https://youtu.be/xN5LRjuf2wU
This is a group assignment (two people per team) that is due by 5 pm on Wednesday 4/3. Submit your work to this Canvas assignment page. Refer to the attached rubric for grading details.
This assignment will close at the stated due date and time. Late submissions will not be possible.
data
| Month | Stock | Dollar per |
| Price | ECU | |
| 1 | 35.550 | 1.1845 |
| 2 | 36.175 | 1.1920 |
| 3 | 36.050 | 1.2085 |
| 4 | 36.175 | 1.2144 |
| 5 | 36.300 | 1.2032 |
| 6 | 36.175 | 1.2107 |
| 7 | 36.800 | 1.2071 |
| 8 | 36.425 | 1.2083 |
| 9 | 36.425 | 1.2052 |
| 10 | 35.425 | 1.2220 |
| 11 | 34.050 | 1.2326 |
| 12 | 33.425 | 1.2376 |
| 13 | 37.675 | 1.2205 |
| 14 | 38.550 | 1.2240 |
| 15 | 38.050 | 1.2315 |
| 16 | 38.800 | 1.2359 |
| 17 | 39.050 | 1.2442 |
| 18 | 39.300 | 1.2407 |
| 19 | 39.800 | 1.2324 |
| 20 | 39.175 | 1.2348 |
| 21 | 39.550 | 1.2097 |
| 22 | 39.050 | 1.2094 |
| 23 | 38.800 | 1.2100 |
| 24 | 38.425 | 1.2075 |
| 25 | 38.925 | 1.2123 |
| 26 | 39.050 | 1.2265 |
| 27 | 40.800 | 1.2344 |
| 28 | 40.550 | 1.2277 |
| 29 | 40.800 | 1.2255 |
| 30 | 40.550 | 1.2381 |
| 31 | 40.550 | 1.2349 |
| 32 | 40.425 | 1.2363 |
| 33 | 38.550 | 1.2363 |
| 34 | 39.300 | 1.2321 |
| 35 | 38.550 | 1.2349 |
| 36 | 38.675 | 1.2313 |
| 37 | 37.800 | 1.2303 |
| 38 | 37.800 | 1.2332 |
| 39 | 37.925 | 1.2341 |
| 40 | 37.800 | 1.2345 |
| 41 | 38.300 | 1.2295 |
| 42 | 38.050 | 1.2382 |
| 43 | 38.675 | 1.2323 |
| 44 | 38.425 | 1.2357 |
| 45 | 38.425 | 1.2326 |
| 46 | 38.925 | 1.2313 |
| 47 | 38.925 | 1.2367 |
| 48 | 38.675 | 1.2379 |
| 49 | 38.300 | 1.2394 |
| 50 | 37.550 | 1.2994 |
| 51 | 37.800 | 1.2994 |
| 52 | 40.050 | 1.2352 |
| 53 | 39.800 | 1.2387 |
| 54 | 39.800 | 1.2447 |
| 55 | 39.425 | 1.2538 |
| 56 | 39.425 | 1.2701 |
| 57 | 39.300 | 1.2684 |
| 58 | 40.050 | 1.2689 |
| 59 | 39.550 | 1.2738 |
| 60 | 39.675 | 1.2694 |
| 61 | 39.640 | 1.2743 |
,
FIN4604 Luis Garcia
Regression Analysis Get Started Answer
The process to answer the interpretation questions should be as follows:
· First, look at the p-value for the X variable. If the p-value is less than 0.05, that means the estimated coefficient on the X is reliably different from zero, which also implies there is an association between the two variables (what are they in the assignment?)
· If the p-value is lower than 0.05, then it makes sense to try to understand what the actual coefficient means. For example, if the estimated coefficient is -0.80, this means that for a 1% change in the X variable, the Y variable changes by -0.80%. In this case, that means that if the euro appreciates by 1% (or the dollar depreciates), the value of the company drops by 0.80%
· Finally, you look at the coefficient of determination or R-squared, which tells you how much of the variation in Y is due to variation in X. For example, 30% of the variation in the value of the company may be due to variation in the exchange rate between the dollar and the euro. The remaining 70% is due to other factors.
