. A U.S. firm holds an asset in Great Britain and faces the following scenario with regard to the exchange rate and prices a year from today:

	State 1				State 2					State 3
Probability	25%				50%					25%
Spot rate	$	2.20	/		$	2.00	/				$	1.80	/
P*		2,000				2,500						3,000
P	$	4,400			$	5,000					$	5,400

P* = Pound price of the British asset

P= Dollar price of the British asset

a. Calculate the expected dollar value of the British asset. Show your work. (1 point)

b. Calculate the variance of the exchange rate. Show your work. (2 points)

c. Calculate the covariance of the spot rate and the dollar value of the British asset. Show your work. (3 points)

d. Use your answers to (b) and (c) to calculate the exposure coefficient (b). Show your work. (2 points)

e. The U.S. firm can mitigate its asset exposure by entering a ______________ (long/short) forward position on

______________________ (give currency and amount) at t=0. (2 points)