A Canadian has a vacation house in Italy and she plans to sell it in one year, but she is worrying about the possible depreciation of euro against Canadian dollar. She has considered the following scenario: State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% Spot exchange rate (S) $1.6/ $1.5/ $1.45/ $1.40/ P* 1500 1400 1300 1200 P $2,400 $2,100 $1,885 $1,680 In the table, P* denotes the euro price of the house and P is the dollar price of the house. (a) Compute the exchange exposure (the coefficient b = Cov(P,S)/Var(S)) for this investor. (b) What is the variance of the dollar price of this asset if the investor does not hedge? (c) If the investor hedges using a forward contract, how can she do it (long or short)? (d) With the forward hedge, what is the variance of the dollar value of the hedged position? And how much is the residual variance of the dollar value of the house?