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A U.S. firm holds an asset in Israel and faces the following scenario in Israeli Shaekel (IS): Probability Case 1 Case 2 Case 3 25%

A U.S. firm holds an asset in Israel and faces the following scenario in Israeli Shaekel (IS):

Probability Case 1 Case 2 Case 3

25% 50% 25%

Spot Price($/IS)0.3000 ($/IS)0.2000 ($/IS)0.1500

Israeli Shaekel price of asset held by U.S. Firm IS2000 IS5000 IS3000

U.S. Dollar price of the same asset $600 $1000 $450

Which of the following conclusions are correct?

a.

Most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk becauseb2[Var(S)] and Var(e) are 236,717 ($)2and 493,751 ($)2respectively.

b.

Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging exchange risk becauseb2[Var(S)] and Var(e) are 236,717 ($)2and 493,751 ($)2respectively.

c.

Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging exchange risk becauseb2[Var(S)] and Var(e) are 8.22 ($)2and 59,211 ($)2, respectively.

d.

Most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk becauseb2[Var(S)] and Var(e) are 8.22 ($)2and 59,211 ($)2respectively.

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