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 $1,000,000, and the exchange rate will be $1.40/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $500,000, and the exchange rate will be $1.60/£. You assess that the American economy will experience a boom with a 70 percent probability and a recession with a 30 percent probability. What is your estimated exposure to the exchange risk? [Pick the closest number for your answer.] £4,511,976 $4,511,976 -$3,445,231 -£3,445,231

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 $1,000,000, and the exchange rate will be $1.40/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $500,000, and the exchange rate will be $1.60/£. You assess that the American economy will experience a boom with a 70 percent probability and a recession with a 30 percent probability. What is your estimated exposure to the exchange risk? [Pick the closest number for your answer.] £4,511,976 $4,511,976 -$3,445,231 -£3,445,231

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter17: Multinational Capital Structure And Cost Of Capital

Section: Chapter Questions

Problem 4BIC

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

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 $1,000,000, and the exchange rate will be $1.40/£. If the American economy
experiences a recession, on the other hand, your American equity stake will be worth $500,000, and the exchange rate will be
$1.60/£. You assess that the American economy will experience a boom with a 70 percent probability and a recession with a 30
percent probability.
What is your estimated exposure to the exchange risk? [Pick the closest number for your answer.]
£4,511,976
$4,511,976
-$3,445,231
-£3,445,231

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