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

State 1 State 2 State 3

Probability 25% 50% 25%

Spot rate $2.50/ $2.00/ $1.60/

P 1,800 2,250 2,812.50

a. Calculate the economic exposure coefficient.

b. Explain what the sign of the covariance means.

c. Calculate the standard deviation of the exchange rate and explain what that number means.