Question: 2. (15 points) Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident,

2. (15 points)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 USD1,000,000, and the exchange

rate will be USD/GBP 1.40. If the American economy experiences a recession, on the

other hand, your American equity stake will be worth USD500,000, and the exchange

rate will be USD/GBP 1.60. You assess that the American economy will experience

a boom with a 70 percent probability and a recession with a 30 percent probability.

Estimate your economic exposure.

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