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

	State 1				State 2				State 3
Probability	25%				50%				25%
Spot rate	$	2.50	/		$	2.00	/		$	1.60	/
P*		1,800				2,250				2,812.50

Where

P^* = Pound sterling price of the asset held by the U.S. firm

The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F₁($/) = $2/. As a result,

Multiple Choice

• he has a perfect hedge.

• the firm's exposure to the exchange rate is made worse.

• none of the options

• he has a nearly perfect hedge.