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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 25 % 25
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 | $ | 1.55 | / | $ | 1.45 | / | $ | 1.35 | / | $ | 1.25 | / | |||
P* | 1,500 | 1,400 | 1,300 | 1,200 | |||||||||||
P | $ | 1,940 | $ | 1,680 | $ | 1,370 | $ | 1,150 | |||||||
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 =
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