3. A US Firm holds an asset in Germany whose value in one year's time depends on the Euro-Dollar exchange rate. In the table below I have given you the probabilities of various scenarios, the future spot rate in one year's time and Euro price of that asset. State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% 1.30$/ 1.35$/ 1.40$/ 1.45$/ Hypothetical Spot Rate (after 1 year) Price in Euros 1 million 1.25 million 1.50 million 1.75 million a. What is the expected EUR value of the asset? What is the expected USD value of the asset? What is the variance of the USD value of the asset b. Compute the exchange exposure faced by the US firm. What are its units? c. Is the exposure higher or lower than the expected EUR value? Why? d. What forward position will hedge this exposure? e. Assume that the forward rate is equal to the expected spot rate. Calculate the USD value of the combined asset plus hedge position as a function of the exchange rate in all the states above. Does it seem like an effective hedge? f. What is the expected USD value of the combined position? What is the variance of the USD value of the combined position? 3. A US Firm holds an asset in Germany whose value in one year's time depends on the Euro-Dollar exchange rate. In the table below I have given you the probabilities of various scenarios, the future spot rate in one year's time and Euro price of that asset. State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% 1.30$/ 1.35$/ 1.40$/ 1.45$/ Hypothetical Spot Rate (after 1 year) Price in Euros 1 million 1.25 million 1.50 million 1.75 million a. What is the expected EUR value of the asset? What is the expected USD value of the asset? What is the variance of the USD value of the asset b. Compute the exchange exposure faced by the US firm. What are its units? c. Is the exposure higher or lower than the expected EUR value? Why? d. What forward position will hedge this exposure? e. Assume that the forward rate is equal to the expected spot rate. Calculate the USD value of the combined asset plus hedge position as a function of the exchange rate in all the states above. Does it seem like an effective hedge? f. What is the expected USD value of the combined position? What is the variance of the USD value of the combined position