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 $1001, and the exchange rate will be $1.28/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $792, and the exchange rate will be $1.45/£. You assess that the American economy will experience a boom with a 70 percent probability and a recession with the remaining probability. Estimate the Covariance between P and S
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 $1001, and the exchange rate will be $1.28/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $792, and the exchange rate will be $1.45/£. You assess that the American economy will experience a boom with a 70 percent probability and a recession with the remaining probability.
Estimate the Covariance between P and S
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