Suppose you are a British venture capitalist holding a major stake in an e$-$commerce start$-$up in Silicon Valley. As a British resident, you are concerned with the pound value of your U$.$S$.$ equity position. Assume that if the American economy booms in the future, your equity stake will be worth $$1,000,000,$ and the exchange rate will be $$1\mathrm{.}40$ per pound. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $$500,000,$ and the exchange rate will be $$1\mathrm{.}60$ per pound. You assess that the American economy will experience a boom with a $70$ percent probability and a recession with a $30$ percent probability.

Required:

a$.$ Estimate your exposure to the exchange risk.

b$.$ Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty.

c$-1.$ How would you hedge this exposure?

c$-2.$ If you hedge, what is the variance of the pound value of the hedged position?

Answer is complete but not entirely correct.

Complete this question by entering your answers in the tabs below.

Required B

Required C$1$

Required C$2$

Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty.

Note: Do not round intermediate calculations. Round final answer to nearest dollar.