Question

In: Finance

Suppose that you hold a piece of land in the City of London that you may...

Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £10,000 and one British pound will be worth $1.36. If the British economy slows down, on the other hand, the land will be worth less, i.e., £9,000, but the pound will be stronger, i.e., $1.44/£. You feel that the British economy will experience a boom with a 70% probability and a slow-down with a 30% probability.

(a) Estimate your exposure b to the exchange risk.

(b) Compute the variance of the dollar value of your property that is attributable to the exchange rate uncertainty.

(c) Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.

Solutions

Expert Solution


Related Solutions

Suppose that you hold a piece of land in the City of London that you may...
Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth $1.40. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the...
Suppose that you hold a piece of land in the City of London that you may...
Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth $1.40. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the...
A French citizen holds a piece of land in the city of London that he wants...
A French citizen holds a piece of land in the city of London that he wants to sell in one year. If the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth of €2.5. If the British economy slows down, the land will be worth of £1,500, and the pound will be worth of €2. He estimates that the British economy will experience a boom with a 60% probability and...
You have mineral rights on a piece of land that you believe may have oil underground....
You have mineral rights on a piece of land that you believe may have oil underground. There is only a 10% chance that you will strike oil if you drill, but the payoff is $200,000. It costs $10,000 to drill. The alternative is not to drill at all, in which case your profit is zero. (c) Draw a decision tree to represent your problem. Should you drill? (d) Use the decision tree to calculate EVPI. (e) Before you drill you...
A city is considering buying a piece of land for $500.000 and construction an office complex...
A city is considering buying a piece of land for $500.000 and construction an office complex on it. Their planning horizon is 20 years. Two mutually exclusive building designs have been drawn up by an architectural firm. Use the modified benefit cost ratio method and a MARR of 10% per year to determine which alternative should be recommended to the city council. Design A (x1000$) Design B (x1000$) Cost of building including cost of the land 1,048 1,315 Resale value...
A city is considering buying a piece of land for $500.000 and construction an office complex...
A city is considering buying a piece of land for $500.000 and construction an office complex on it. Their planning horizon is 20 years. Two mutually exclusive building designs have been drawn up by an architectural firm. Use the modified benefit cost ratio method and a MARR of 10% per year to determine which alternative should be recommended to the city council. Design A (x1000$) Design B (x1000$) Cost of building including cost of the land 1,107 1,306 Resale value...
A city is considering buying a piece of land for $500.000 and construction an office complex...
A city is considering buying a piece of land for $500.000 and construction an office complex on it. Their planning horizon is 20 years. Two mutually exclusive building designs have been drawn up by an architectural firm. Use the modified benefit cost ratio method and a MARR of 10% per year to determine which alternative should be recommended to the city council. Design A (x1000$) Design B (x1000$) Cost of building including cost of the land 1,192 1,320 Resale value...
DP Plc is considering whether to purchase a piece of land close to a major city...
DP Plc is considering whether to purchase a piece of land close to a major city airport. The land will be used to provide 600 car parking spaces. The cost of the land is K6,000,000 but further expenditure of K2,000,000 will be required immediately to develop the land to provide access roads and suitable surfacing for car parking. DP Plc is planning to operate the car park for five years after which the land will be sold for K10,000,000 at...
You are working for an investment firm in the City of London and have been asked...
You are working for an investment firm in the City of London and have been asked to perform some analysis of the European-style call options of a company called Elevation Matters Plc (EM). The most recent closing share price for EM was £38. The risk-free rate is 3%. The time to expiry for the options is one year. The volatility (standard deviation) of EM’s shares is 25% and the company has decided not to pay any dividends this year. On...
suppose we are interested in bidding on a piece of land and we know one other...
suppose we are interested in bidding on a piece of land and we know one other bidder is interested. The seller announced that the highest bid in excess of $10,000 will be accepted. Assume that the competitors bid x is a random variable that is uniformly distributed between $10,000 and $15,400. A) suppose you bid $12,000. What is the probability that your bid will be accepted (to 2 decimals)? B) suppose you bid $14,000. What is the probability that your...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT