In the equation Profits = a + b * ($/₤ exchange rate), b is a measure of
A)the firm's beta when measured in terms of the foreign currency.
B)the ratio of the firm's beta in terms of dollars to the firm's beta in terms of pounds.
C)the sensitivity of profits to the exchange rate.
D)the sensitivity of the exchange rate to profits.

Question

Quizplus · Accepted Answer

In the given equation, the coefficient 'b' represents the sensitivity of profits to the exchange rate. It indicates the extent to which a change in the exchange rate affects the profits of the firm. Therefore, option C is the correct choice. Option A is incorrect because the equation does not involve the firm's beta. Option B is incorrect because it refers to the ratio of betas, which is not relevant in this equation. Option D is also incorrect as it implies that profits are influencing the exchange rate, which is not the case in this equation.

In the Equation Profits = a + B * ($/₤