Reference no: EM132928970

Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £1,817 and one British pound will be worth $1.35. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,409, but the pound will be stronger, i.e., $1.55/£. You feel that the British economy will experience a boom with a 60% probability and a slow-down with a 40% probability.

Problem 1: Compute the variance of the dollar value of your property that is attributable to the exchange rate uncertainty.