Reference no: EM133047278

Questions -

Q1. Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $933, and the exchange rate will be $1.32/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $788, and the exchange rate will be $1.39/£. You assess that the American economy will experience a boom with a 50 percent probability and a recession with the remaining probability. Estimate the Covariance between P and S.

Q2. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥652 million payable in one year to a bank in Tokyo. The current spot rate USDJPY = 105.27 and the one year forward rate is 104.84. The annual interest rate is 1.3 percent in Japan and 2.6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0093 per yen for a premium of 0.031 cent per yen. Assume that the forward rate is the best predictor of the future spot rate. What the future dollar cost of meeting this obligation using the option hedge?