Foreign Investment (50 points)
Download and read the attached case problem from the sixth edition of your textbook, International Financial Management:
Answer the three questions below (found also below the problem in the document) with respect to selling property in the
city of London:
Estimate your exposure to the exchange risk.
Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
Discuss how you can hedge your exchange risk exposure and examine the [possible] consequences of hedging.
Your answer should be 2-3 pages in length, well-written, and formatted per CSU-Global specifications for APA Style.
Support your analysis by referencing and citing at least two credible sources, in addition to the textbook, that you used to
assist you in your responses.
OUR COURSE BOOK IS Eun, C.,&Resnick, B. (2012).International financial management(6thed.). New York, NY: McGraw-Hill
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 $1.50/£. If the British economy slows down, on the other hand, the land
will be worth less, say, £1,500, but the pound will be weaker, say, $1.40/£. You feel that the British economy will
experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
a. Estimate your exposure to the exchange risk.
b. Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
c. Discuss how you can hedge your exchange risk exposure and examine the [possible] consequences of hedging.