Exchange Risk

Question 1

Consider the following case problem from the eighth edition of your textbook, International Financial Management (Chapter 9).

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, say £1,500, but the pound will be stronger, say $1.50/£. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.

Answer the three questions below with respect to selling property in the city of London:

  1. Estimate your exposure to the exchange risk.
  2. Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
  3. Discuss how you can hedge your exchange risk exposure and examine the [possible] consequences of hedging.

Your paper should be 4-5 pages and well written. Support your analysis by referencing and citing at least two credible sources.

Question 2

Pick a company of your choosing

When did the (Your Company) announce its second quarter (Q2) 2018 earnings per share (EPS)? What was the consensus EPS estimate by the analysts? Was there a positive surprise (or negative) upon announcement? What was the stock price before and after the announcement? If you can get information immediately before and after the announcement that will be nice! You may have to call the investor relations department of the company. Alternatively, you can pick the closing price on the announcement day and the prior day (pre announcement day).

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