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 $933, and the exchange rate will be $1.32/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $788, and the exchange rate will be $1.39/£. You assess that the American economy will experience a boom with a 50 percent probability and a recession with the remaining probability. Estimate the Covariance between P and S (X.XXX)

6) Suppose that the European central bank increased money supply right after you bought the European financial assets. How that change might affect the expected return you will get at the end of the period as an American investor? (Use graphs)

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

Suppose you are working for a company based in Ireland (where the euro is used). This company exports product to the UK, but invoices its prices in euros (instead of pounds). Suppose you believe the euro will appreciate versus the pound over the coming year. Would that impact the profitability of your company this year? If not, explain. If so, explain how (and the type of risk you’re facing.