Reference no: EM133064843

Question - Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a US, 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 £2,000, and one British pound will be worth $3.40. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $3.50/£, You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.

a. Estimate your exposure (b) to the exchange risk.

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