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2. A U.S. firm holds an asset in Spain and faces the following scenario. In the below table, P is the euro price of

 


2. A U.S. firm holds an asset in Spain and faces the following scenario. In the below table, P is the euro price of the asset held by the U.S. firm. Spot rate P USD/EUR 0.90 EUR 1,500 Probability State 1 30% State 2 20% State 3 State 4 20% USD/EUR 1.00 EUR 1,400 USD/EUR 1.10 EUR 1,300 30% USD/EUR 1.20 EUR 1,200 (a) What is the economic exposure faced by the U.S firm? (b) What can the U.S. firm do to reduce/eliminate the exposure? Can the exposure be completely eliminated? Why?

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