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

State 1State 2State 3State 4Probability25%25%25%25%Spot rate$ 1.90per euro$ 1.80per euro$ 1.70per euro$ 1.60per euroP* 1,500 1,400 1,300 1,200P$ 2,080$ 1,820$ 1,440$ 1,220

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.

Required:

1. Compute the exchange exposure faced by the U.S. firm.
2. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure?
3. 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?