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 $$2\mathrm{.}10.$ If the British economy slows down, on the other hand, the land will be worth less, say, $1,500,$ but the pound will be stronger, say, $$2\mathrm{.}20$ per pound. You feel that the British economy will experience a boom with a $60$ percent probability and a slowdown with a $40$ percent probability.

Required:

a$.$ Estimate your exposure $(b)$ to the exchange risk.

Note: Negative amount should be indicated by a minus sign.

b$.$ Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.

a$.$ Exposure

b$.$ Variance