Reference no: EM132973896

Problem 1: Assume that you rent an apartment in London. As a U.S. resident, you are concerned with the dollar value of the rent. If the British economy booms in the future, the rent will increase to £2,000, and one British pound will be worth $1.42. If the British economy slows down, on the other hand, the rent will fall to £1,500, but the pound will be stronger, i.e., $1.52/£. You feel that the British economy will experience a boom with a 60% probability and a recession with a 40% probability.

Problem 2: What is your exposure coefficient, b (include your calculations)? What does the value imply?

Problem 3: Based on your b, how can you hedge your exchange risk exposure? Explain.

Problem 4: At this time, sporting goods exporter Sports Exports receives payments in British pounds for the monthly exports it sends to the United Kingdom. Although all of its receivables are denominated in pounds, it has no payables in pounds or any other foreign currency. Sports Exports wants to assess the firm's exposure to exchange rate risk.

Problem 5: Does the company face transaction, economic, or translation exposure? Explain.