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. As an economist, you estimate 3 scenarios for the future, as described in the table below:

Scenario

Probability

Forecast exchange rate (/$)

Forecast asset value (in $)

1

0.2

0.7485

$1,000,000

2

0.4

0.7470

$700,000

3

0.4

0.7451

$500,000

(a) Estimate your exposure to the exchange risk.[6 MARKS]

(b)How would you hedge this exposure? Suppose the forward rate is 0.7460 /$. Calculate the GBP value of the hedged portfolio under each of the scenarios above[4 MARKS]

IN YOUR CALCULATION, KEEP 4 DECIMAL POINTS FOR THE EXCHANGE RATES, AND NO DECIMAL POINTS FOR CURRENCY NUMBERS.