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. Now you are facing an uncertain outcome of the British vote on whether to stay in the European Union. Assume that if the vote is “Remain”, in one year the land will be worth £20,000 and one British pound will be worth $1.65/£. If the vote is “Leave”, in one year the land will be worth £14,000 and the pound will be worth $1.35/£. You feel that the “Remain” vote has a 55 percent probability and the “Leave” vote has a 45 percent probability.
What is your estimated exposure to the exchange risk?
£46,948
£43,150
£53,917
$34,523