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A U . S . firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability
A US firm holds an asset in France and faces the following scenario:
State State State State
Probability
Spot rate $ $ $ $
P
P $ $ $ $
In the above table, P is the euro price of the asset held by the US firm and P is the dollar price of the asset.
a Compute the exchange exposure faced by the US firm.
b What is the variance of the dollar price of this asset if the US firm remains unhedged against this exposure?
c If the US firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position?
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