a U.S. firm holds an asset in Great Britain and faces the following scenario: (13 points) Probability Spot rate P* P State 1 25% $ $ 2.20 / 3,000 6,600 State 2 50% $ $ 2.00 / 2,500 5,000 P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset State 3 25% $ 1.80 / $ 2,000 3,600 K 1) Compute the expected value of P and S. 2) What is the covariance of P and S? 3) Identify the value of b in the regression of the form P = a + bxS+e. 4) How can this company perform an effective hedge by using financial assets (e.g., forward contract)?

a U.S. firm holds an asset in Great Britain and faces the following scenario: (13 points) P= Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset 1) Compute the expected value of P and S. 2) What is the covariance of P and S ? 3) Identify the value of b in the regression of the form P=a+bS+e. 4) How can this company perform an effective hedge by using financial assets (e.g. forward contract)? a U.S. firm holds an asset in Great Britain and faces the following scenario: (13 points) P - Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset 1) Compute the expected value of P and S. 2) What is the covariance of P and S ? 3) Identify the value of b in the regression of the form P=a+bS+e. 4) How can this company perform an effective hedge by using financial assets (e.g. forward contract)