A U.S. firm holds an asset in U.K. and faces the following scenarios: Probability S(USD/GBP) 1.2 1/3 1/3 1.25 3 1/3 1.32 P(GBP) is the pound value of the asset. Outcome 1 2 P(GBP)* 2,300 3,150 3,580 (a) What is the size of asset exposure to the exchange rate risk? (b) What is the variance of the unhedged position? (c) Suppose the U.S. firm wants to hedge this exposure by using a forward contract, should the company take a long or short position on U.K. pound forward contract? (d) Suppose the forward exchange rate is 1-$1.26, what is the variance of the hedged position?

A U.S. firm holds an asset in U.K. and faces the following scenarios: P(GBP) is the pound value of the asset. (a) What is the size of asset exposure to the exchange rate risk? (b) What is the variance of the unhedged position? (c) Suppose the U.S. firm wants to hedge this exposure by using a forward contract, should the company take a long or short position on U.K. pound forward contract? (d) Suppose the forward exchange rate is 1=$1.26, what is the variance of the hedged position