Question

1. Referring to the equation Var(P) = b² Var(S) + Var(e), the venture capitalist can calculate Var(e) to understand the uncertainty that is attributable to the exchange rate uncertainty.

True or FALSE?

2. Referring to the equation Var(P) = b² Var(S) + Var(e), the venture capitalist can calculate b² Var(S) to understand the part of the uncertainty that is independent of exchange rate movements.

TRUE OR FALSE?

3. Referring to the equation Var(P) = b² Var(S) + Var(e), the venture capitalist can calculate Var(e) to understand the part of the uncertainty that can be eliminated via hedging.

TRUE OR FALSE?

4. Referring to the equation Var(P) = b² Var(S) + Var(e), the venture capitalist can Reduce Var (P) to zero via appropriate hedging.

TRUE OR FALSE?

Answer 1

For equation Var(P) = b2 Var(S) + Var(e),

b2 Var(S) represents the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate.

Var(e) represents the residual part of the dollar value variability that is independent of exchange rate movements.

So

1) answer FALSE

2) answer FALSE

3) answer FALSE

As Var(e) represents variability that is independent of exchange rate movements, its determination wouldnot help to find how to hedge an asset.

Instead b2 Var(S) will help to understand the part of the uncertainty that can be eliminated via hedging.

4) answer TRUE

if Var(e) = 0 and b2 Var(S) can be made 0 with help of proper heding then Var (P) will reduce to zero.