Question
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. |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started