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 per pound. 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 per pound. You assess that the American economy will experience a boom with a 70 percent probability and a recession with a 30 percent probability. Required: a. Estimate your exposure to the exchange risk. b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. c-1. How would you hedge this exposure? c-2. If you hedge, what is the variance of the pound value of the hedged position? Complete this question by entering your answers in the tabs below. Required A Required B Required C1 Required C2 Estimate your exposure to the exchange risk. Note: Do not round intermediate calculations. Round final answer to nearest dollar. Exposure $ 4,500,160

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 per pound. 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 per pound. You assess that the American economy will experience a boom with a 70 percent probability and a recession with a 30 percent probability. Required: a. Estimate your exposure to the exchange risk. b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. c-1. How would you hedge this exposure? c-2. If you hedge, what is the variance of the pound value of the hedged position? Complete this question by entering your answers in the tabs below. Required A Required B Required C1 Required C2 Estimate your exposure to the exchange risk. Note: Do not round intermediate calculations. Round final answer to nearest dollar. Exposure $ 4,500,160

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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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)
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 $946, and the exchange rate will be $1.34/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $768, and the exchange rate will be $1.39/£. You assess that the American economy will experience a boom with a 80 percent probability and a recession with the remaining probability. Estimate the expected value of the spot rate (in £ X.XXXX)
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 $1,000,000, and the exchange rate will be $1.58 per pound. 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 $1.78 per pound. You assess that the American economy will experience a boom with a 70 percent probability and a recession with a 30 percent probability. Required: a. Estimate your exposure to the exchange risk. b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. c-1. How would you hedge this exposure? c-2. If you hedge, what is the variance of the pound value of the hedged position?
Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up inSilicon Valley. As a British resident, you are concerned with the pound value of your U.S. equityposition. 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 $1.66 per pound. If the American economy experiences arecession, on the other hand, your American equity stake will be worth $500, 000, and the exchangerate will be $1.86 per pound. You assess that the American economy will experience a boom with a70 percent probability and a recession with a 30 percent probability. Required: a. Estimate yourexposure to the exchange risk. b. Compute the variance of the pound value of your American equityposition that is attributable to the exchange rate uncertainty. c-1. How would you hedge thisexposure? c-2. If you hedge, what is the variance of the pound value of the hedged position?
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