Suppose you are An Australian venture capitalist holding a major stake in an e-commerce start-up

in the UK. As an Australian resident, you are concerned with the pound value of your UK

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

Scenario

Probability

Forecast exchange rate (A$/)

Forecast asset value (in )

1

0.4

1.3100

1,000,000

2

0.3

1.3085

700,000

3

0.3

1.3051

500,000

(a) Estimate your exposure to the exchange risk.

(b)How would you hedge this exposure? Suppose the forward rate is 1.3090 A$/. Calculate the AUD value of the hedged portfolio under each of the scenarios above