a U.S. firm holds an asset in Great Britain and faces the following scenario: (13 points)

	State 1				State 2				State 3
Probability	25%				50%				25%
Spot rate	$	2.20	/		$	2.00	/			$	1.80	/
P*		3,000				2,500					2,000
P	$	6,600			$	5,000				$	3,600

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 + b S + e.

4) How can this company perform an effective hedge by using financial assets (e.g., forward contract)?