Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon
Question:
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. As an economist, you estimate 3 scenarios for the future, as described in the table below:
Scenario
Probability
Forecast exchange rate (/$)
Forecast asset value (in $)
1
0.2
0.7485
$1,000,000
2
0.4
0.7470
$700,000
3
0.4
0.7451
$500,000
(a) Estimate your exposure to the exchange risk.[6 MARKS]
(b)How would you hedge this exposure? Suppose the forward rate is 0.7460 /$. Calculate the GBP value of the hedged portfolio under each of the scenarios above[4 MARKS]
IN YOUR CALCULATION, KEEP 4 DECIMAL POINTS FOR THE EXCHANGE RATES, AND NO DECIMAL POINTS FOR CURRENCY NUMBERS.