Problem 9.3

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 $1,002,400, 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 $502,720, 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. (Round final answer to nearest dollar.)

Exposure= X

b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. (Round final answer to nearest dollar.)

Variance= X