A U.S. firm holds an asset in France and faces the following scenario:

State 1				State 2				State 3				State 4
Probability		25	%			25	%			25	%			25	%
Spot rate	$	2.10	/		$	2.00	/		$	1.90	/		$	1.80	/
P*		1,500				1,400				1,300				1,200
P	$	2,160			$	1,900			$	1,480			$	1,260

In the above table, P* is the euro price of the asset held by the U.S. firm and P is the dollar price of the asset.

a. Compute the exchange exposure faced by the U.S. firm.

b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure?

c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position?

A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate ps State 1 State 2 State 3 25% 25% 25% $ 2.10/ $ 2.00/ $ 1.90/ 1,500 1,400 1,300 $2,160 $1,900 $ 1,480 State 4 25% $ 1.80/ 1,200 $1,260 In the above table, P is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. Exposure b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position? Variance