Question

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 £1,898 and one British pound will be worth $1.43. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,351, but the pound will be stronger, i.e., $1.62/£. You feel that the British economy will experience a boom with a 60% probability and a slow-down with a 40% probability.

(b) Compute the variance of the dollar value of your property that is attributable to the exchange rate uncertainty.

Answer 1

gled Answer: Let us compute the neces cessary parametervalues ; ECP)=(66X$2,7)+(64)42,189 = $1628.4+876 =$2504.4 =$2504. FCs) =Cor) (1.43)+(0.470162) = 0.86 +0.65 =1.51 Vox (s) = (0.6)(1.43–1.50) + (0.4)Cİ.C2–1951) -0.00384 +0.00484 = 0.00868 coucas) =(6.6X8,714– 2504X1.43–1.51) +60-4) (2,189 – 2504)(1.62–1.51) = -10.08-13.86 =- 83.94

وع b=COWAYway (8 =-23 -23.94/ 0.008 --£2,758 WC get a negative Exposure fis the pound gety strogor (weaker) the dollar, the dollar against value do your british holding goes downlup). or(s)=(-3A58) 2006 =$66,025 b