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    FZ5000 Solución Tarea 4 AJ2020

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    gerardo
    This document discusses hedging exchange rate risk from owning a piece of land in London that will be sold in one year. It estimates the expected value of the land in British pounds and the expected exchange rate in different economic scenarios. The exposure to exchange rate risk is calculated as -£5,500, meaning a stronger pound reduces the dollar value of the land. Hedging this exposure by buying £5,500 forward contracts eliminates the $72,600 variance from exchange rate volatility.

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    FZ5000 Solución Tarea 4 AJ2020

    Uploaded by

    gerardo
    32 views2 pages
    This document discusses hedging exchange rate risk from owning a piece of land in London that will be sold in one year. It estimates the expected value of the land in British pounds and the expected exchange rate in different economic scenarios. The exposure to exchange rate risk is calculated as -£5,500, meaning a stronger pound reduces the dollar value of the land. Hedging this exposure by buying £5,500 forward contracts eliminates the $72,600 variance from exchange rate volatility.

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    FZ5000 Solución tarea 4 AJ2020 (1)

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    This document discusses hedging exchange rate risk from owning a piece of land in London that will be sold in one year. It estimates the expected value of the land in British pounds and the expected exchange rate in different economic scenarios. The exposure to exchange rate risk is calculated as -£5,500, meaning a stronger pound reduces the dollar value of the land. Hedging this exposure by buying £5,500 forward contracts eliminates the $72,600 variance from exchange rate volatility.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    32 views2 pages

    FZ5000 Solución Tarea 4 AJ2020

    Uploaded by

    gerardo
    This document discusses hedging exchange rate risk from owning a piece of land in London that will be sold in one year. It estimates the expected value of the land in British pounds and the expected exchange rate in different economic scenarios. The exposure to exchange rate risk is calculated as -£5,500, meaning a stronger pound reduces the dollar value of the land. Hedging this exposure by buying £5,500 forward contracts eliminates the $72,600 variance from exchange rate volatility.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 2

    Finanzas Internacionales AJ2020

    Chapter 8 Chapter 9
    Question 3 Problem 1
    Discuss and compare the costs of hedging via the forward contract and the options contract.

    There is no up-front cost of hedging by forward contracts. In the case of options hedging, however, Suppose that you hold
    hedgers should pay the premiums for the contracts up-front. The cost of forward hedging, however, a U.S. resident, you a
    may be realized ex post when the hedger regrets his/her hedging decision. economy booms in th
    $1.40. If the British ec
    £1,500, but the pound
    Question 10 experience a boom w
    Explain cross-hedging and discuss the factors determining its effectiveness. (a) Estimate your exp
    (b) Compute the varia
    Cross-hedging involves hedging a position in one asset by taking a position in another asset. The rate uncertainty.
    effectiveness of cross-hedging would depend on the strength and stability of the relationship (c) Discuss how you ca
    between the two assets. hedging.
    a)

    b)

    c)
    Finanzas Internacionales AJ2020

    Chapter 9
    Problem 1

    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 pound will be stronger, i.e., $1.50/£. You feel that the British economy will
    experience a boom with a 60% probability and a slow-down with a 40% 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.
    E(P) = 0.6 x 2,800 + 0.4 x 2,250
    = 2,580

    E(S) = 0.6 x 1.40 + 0.4 x 1.5


    = 1.44

    Var(S) = 0.6 x (1.40 - 1.44)2 + 0.4 x (1.5 - 1.44)2


    = 0.0024

    Cov(P,S) = 0.6 x (2,800 - 2,580)(1.4 - 1.44) + 0.4 x (2,250 - 2,580)(1.5 - 1.44)


    = (13.20)

    Cov(P,S) (13.20)
    b= = = -£5,500 As the pound gets stronger (weaker) against
    Var(S) 0.0024 the dollar, the dollar value of your British
    holdings goes down (up).

    b2Var(S) = (-5,500)2 x 0.0024


    = $72,600

    Buy £5,500 forward. By doing so, you can eliminate the volatility of the dollar value of your
    British asset that is due to the exchange rate volatility.

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