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

State 1State 2State 3Probability25%50%25%Spot rate$2.50/$2.00/$1.60/P^*1,8002,2502,812.50P$4,500$4,500$4,500

where,

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

P = Dollar price of the same asset

The "exposure" (i.e., the regression coefficient beta) is

Hint:CalculatetheexpressionCov(P,S)

Var(S)

Hint:CalculatetheexpressionCov(P,S)Var(S)

Multiple Choice

• 7,500
• 2,500
• 2,500
• none of the options