Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and one British pound will be worth $3.10. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $3.20/£. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability. a. Estimate your exposure (b) to the exchange risk. (Negative amount should be indicated by a minus sign.) Exposure b. Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty. Variance
Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and one British pound will be worth $3.10. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $3.20/£. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability. a. Estimate your exposure (b) to the exchange risk. (Negative amount should be indicated by a minus sign.) Exposure b. Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty. Variance
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Ee 162.
Transcribed Image Text:Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are
concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and
one British pound will be worth $3.10. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but
the pound will be stronger, say, $3.20/£. You feel that the British economy will experience a boom with a 60 percent probability and a
slowdown with a 40 percent probability.
a. Estimate your exposure (b) to the exchange risk. (Negative amount should be indicated by a minus sign.)
Exposure
b. Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
Variance
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