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 $1.40/. 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 $1.60/. You assess that the American economy will experience a boom with 70 percent probability and a recession with a 30 percent probability.

What is your estimated exposure to the exchange risk?

1. $4,511,976
2. 4,511,976
3. - $3,445,231
4. -3,445,231

Which of the following would effectively hedge your exchange risk exposure?

1. Sell $4,511,976 forward
2. Sell 4,511,976 forward
3. Buy $3,445,231 forward
4. Buy 3,445,231 forward