Estimate your exposure to the exchange risk

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Reference no: EM131064638

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 a boom and a recession are equally likely to happen. Estimate your exposure to the exchange risk (i.e., find the coefficient b).

Reference no: EM131064638

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