Suppose you are a British venture capitalist holding a major stake an e-commerce start- up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $1,001,140, and the exchange rate will be $1.4/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $501,280, and the exchange rate will be $1.6/£. You assess that the American economy will experience a boom with a 30 percent probability and a recession with a 70 percent probability. a. Estimate your exposure to the exchange risk. (Round final answer to nearest dollar.) Exposure b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. (Round final answer to nearest dollar.) Variance

Suppose you are a British venture capitalist holding a major stake an e-commerce start- up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $1,001,140, and the exchange rate will be $1.4/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $501,280, and the exchange rate will be $1.6/£. You assess that the American economy will experience a boom with a 30 percent probability and a recession with a 70 percent probability. a. Estimate your exposure to the exchange risk. (Round final answer to nearest dollar.) Exposure b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. (Round final answer to nearest dollar.) 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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Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $1,001,280, and the exchange rate will be $1.4/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $501,440, and the exchange rate will be $1.6/£. You assess that the American economy will experience a boom with a 40 percent probability and a recession with a 60 percent probability. a. Estimate your exposure to the exchange risk. (Do not round intermediate calculations.) Exposure b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. (Do not round intermediate calculations.) Variance
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Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $946, and the exchange rate will be $1.34/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $768, and the exchange rate will be $1.39/£. You assess that the American economy will experience a boom with a 80 percent probability and a recession with the remaining probability. Estimate the expected value of the spot rate (in £ X.XXXX)

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