A US Firm holds an asset in Germany whose value in one year's time depends on the Euro$-$Dollar

exchange rate. In the table below I have given you the probabilities of various scenarios, the

future spot rate in one year's time and Euro price of that asset.

a$.$ What is the expected EUR value of the asset? What is the expected USD value of the

asset? What is the variance of the USD value of the asset

b$.$ Compute the exchange exposure faced by the US firm. What are its units?

c$.$ Is the exposure higher or lower than the expected EUR value? Why?

d$.$ What forward position will hedge this exposure?

e$.$ Assume that the forward rate is equal to the expected spot rate. Calculate the USD value

of the combined asset plus hedge position as a function of the exchange rate in all the

states above. Does it seem like an effective hedge?

f$.$ What is the expected USD value of the combined position? What is the variance of the

USD value of the combined position?