Question

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 a slowdown with a 40% probability.

1. Calculate the French’s citizen’s asset exposure
2. Compute the variance of the home currency value of his foreign property that is attributable to the exchange rate uncertainty.
3. How the French citizen hedges his foreign asset exposure? Discuss the consequence of hedging with calculations.

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Answer 1

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