(QUESTIONS 3. Discuss and compare the costs of hedging by forward contracts and options 10, Explain cross-hedging and discuss the factors determining its effectiveness. 1. Suppose that you hold a piece of land in the cty of London that you may want to sellin one year. Asa US. resident, you are concerned with the dollar value of the land. Assume that ifthe British economy booms in the future, dhe land will be ‘worth £2,000, and one British pound will he worth $1.40. Ithe British economy slows down, on the other hand, the land will be worth less say, £1,500, but the ound willbe stronger, sy, $1.50. You fet thatthe British economy’ will expe= Fience a boom with 3 60 percent probability and a slowdown with a 40 percent probability. a, Estimate your exposure (6) tothe exchange risk b. Compute the variance ofthe dollrvulueof your property thats auributabe to ‘exchange rte uncertainty. «. Discuss how you can hedge your exchange risk exposure and ‘consequences of hedging. 0 examine the