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 oncerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, ne British pound will be worth $2.80. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500 out the pound will be stronger, say, $2.90/£. You feel that the British economy will experience a boom with a 60 percent probability nd a slowdown with a 40 percent probability. . Estimate your exposure (b) to the exchange risk. (Negative amount should be indicated by a minus sign.) Exposure . Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
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 oncerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, ne British pound will be worth $2.80. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500 out the pound will be stronger, say, $2.90/£. You feel that the British economy will experience a boom with a 60 percent probability nd a slowdown with a 40 percent probability. . Estimate your exposure (b) to the exchange risk. (Negative amount should be indicated by a minus sign.) Exposure . Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
Chapter9: Forecasting Exchange Rates
Section: Chapter Questions
Problem 6ST
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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 $2.80. 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, $2.90/£. 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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