Reference no: EM132928968

Problem 1: 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 £2,000 and one British pound will be worth $1.40. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the pound will be stronger, i.e., $1.50/£. You feel that the British economy will experience a boom with a 60% probability and a slow-down with a 40% probability. Assume that economic exposure measured by beta (b) is -5500. What's your risk and how could you hedge your risk in forward markets?

Group of answer choices

A) My risk is pound appreciation and I should sell £5500 in forward market.

B) My risk is pound depreciation and I should buy £5500 in forward market.

C) My risk is pound depreciation and I should sell £5500 in forward market.

D) My risk is pound depreciation and I should buy $5500 in forward market.

E) My risk is pound appreciation and I should sell $5500 in forward market.

F) My risk is pound appreciation and I should buy £5500 in forward market.