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Suppose that you hold a piece of land in the City of Paris that you may want to sell in one year. As a S.

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Suppose that you hold a piece of land in the City of Paris that you may want to sell in one year. As a S. resident, you are concerned with the dollar value of the land. Assume that, if the French economy booms m the future, the land will be worth E4.000 and one Euro will be worth $1.50. If the French economy slows down, on the other hand, the land will be worth less, i.e., E2.000 but the Euro will be stronger, i.e. $1.20. You feel that the French economy will experience a boom with a 75% probability and a slow down with a 25% probability. Estimate your exposure b to the exchange risk. Compute the variance of the dollar value of your property that is attributable to the exchange rate uncertainty. Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging in this case

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