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. Assume that if the American economy booms in the future, your equity stake will be worth $1,000,000, and the will be $1.40/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $500,000, and the will be $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.
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 uncertainty.
c. How would you hedge this exposure? If you hedge, what is the variance of the pound value of the hedged position?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...