Estimate the exposure b to the exchange risk

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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 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 £18 and one British pound will be worth $1.33. If the British economy slows down, on the other hand, the land will be worth less, i.e., £21 million, but the pound will be stronger, i.e., $1.41/£. You feel that the British economy will experience a boom with a 50% probability and a slow-down with the remaining probability.

Estimate the exposure b to the exchange risk. (USD, no cents).

Reference no: EM133495981

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