2. Suppose you are an American venture capitalist holding a major stake in an e-commerce start-up in the U.K. As an American resident, you are concerned with the pound value of your U.K. equity position. Assume there are four possible outcomes, each equally likely. The values are as follows: P 0.25 0.25 0.25 0.25 P = a + bxS + e P(F) 18,000 9,000 12,000 20,000 Mean S $ $ 1.55 $ 1.51 $ $ 1.43 $ $ 1.47 $ $ 1.49 $ A. Estimate your exposure (b) to the exchange risk B. Compute the variance of the dollar value of your U.K. equity position that is attributable to the exchange rate uncertainty C. Compute the residual variance after the hedge is in place (VAR(e)). P=P(F)*S 27,900 13,590 17,160 29,400 22,013 D. What is the net amount for each outcome after the hedge is placed? Assume the forward rate is $1.49/ FORMULAS

2. Suppose you are an American venture capitalist holding a major stake in an e-commerce start-up in the U.K. As an American resident, you are concerned with the pound value of your U.K. equity position. Assume there are four possible outcomes, each equally likely. The values are as follows: A. Estimate your exposure (b) to the exchange risk B. Compute the variance of the dollar value of your U.K. equity position that is attributable to the exchange rate uncertainty C. Compute the residual variance after the hedge is in place (VAR(e)). D. What is the net amount for each outcome after the hedge is placed? Assume the forward rate is $1.49/ FORMULAS P=a+bxS+e