2. You are a Spanish fund manager, and you are bullish on British equity and want to invest 10 million in the British equity market. The spot exchange rate is 1.60/. At that exchange rate, the 10 million can be converted into 6.25 million. You can then invest the 6.25 million in the British equity market. Suppose your investment horizon is 1 year. You consider three scenarios for the return in the British equity market: An increase in the market value of the stock by 10% (with probability 60%), a decrease of 10% (with probability 30%), and no change (with probability 10%). After earning the British equity return, you can then sell the pound return for euros. An appreciation of the pound enhances euro returns, and a depreciation of the pound diminishes euro returns. You consider three possible scenarios for the change in the value of the pound as well: a 10% appreciation to 1.76/), a 10% depreciation (to 1.44/), and no change. a. Compute the expected euro return and volatility of the investment, assuming each of the three possible scenarios for the change in the value of the pound is equally likely and uncorrelated with the return of the equity market. . b. Suppose there is perfect positive correlation between the return of the equity market and the appreciation of the pound, and repeat the exercise. . c. Repeat the exercise assuming perfect negative correlation. What conclusions do you draw from this analysis?

2. You are a Spanish fund manager, and you are bullish on British equity and want to invest 10 million in the British equity market. 'The spot exchange rate is 61.60/L. At that exchange rate, the 810 million can be converted into f6.25 million. You can then invest the 6.25 million in the British equity market. Suppose your investment horizon is 1 year. You consider three scenarios for the return in the British equity market: An increase in the market value of the stock by 10% (with probability 60% ), a decrease of 10% (with probability 30% ), and no change (with probability 10% ). After earning the British equity return, you can then sell the pound return for euros. An appreciation of the pound enhances euro returns, and a depreciation of the pound diminishes euro returns. You consider three possible scenarios for the change in the value of the pound as well: a 10% appreciation to 1.76/E ), a 10% depreciation (to 1.44/E ), and no change. - a. Compute the expected curo return and volatility of the investment, assuming each of the three possible scenarios for the change in the value of the pound is equally likely and uncorrelated with the return of the equity market. - b. Suppose there is perfect positive correlation between the return of the equity market and the appreciation of the pound, and repeat the exercise. - c. Repeat the exercise assuming perfect negative correlation. What conclusions do you draw from this amalysis