. a) 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 il the British economy booms in the future, the land will be worth ' 2,000, and one British pound will be worth $1.80. If the British economy slows down, on the other hand, the land will be worth less, say, , 1,500, but the pound will be stronger, say, $2.20/ , You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.

Estimate your exposure 'b' to the exchange rate.

b. b) A U.S. firm holds a-n asset in Great Britain and faces the following scenario'

State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/ $2.00/ $1.80/ P* 2,000 2,500 3,000 P $4,400 $5,000 $5,400 where, p* = Pound sterling price of the asset held by the U.S. firm p = Dollar price of the same asset i. calculate the exposure (i.e., the regression coefficient beta) is ii. if the firm sells the exposure forward, what will be the dollar proceeds that the firm will receive assuming the forward rate given is as $2.2/ Hint: b(F-S)

iii. Using state 1 calculate the dollar value of the hedged position.