A US firm will sell its pharmaceutical products in Britain the next year, but the exact amount of the revenues is uncertain as it will depend on the trade deal between UK and US after Brexit. The risk management team of the company comes up with the following scenarios that could realize in one year:

State Probability Revenues (P*) S

1 1/3 GBP 980,000 USD/GBP 1.40

2 1/3 GBP 1,000,000 USD/GBP 1.50

3 1/3 GBP 1,070,000 USD/GBP 1.60

The CFO of the firm thinks that to hedge the exposure computed above one has tobuya forward contract. You disagree with the CFO and think that one shouldsella forward contract. To check whether you are correct do the following:

Compare the standard deviation of the hedged position under your strategy andunder the CFO'sstrategy. (Hint: compute first the expected value of the revenues of the two strategies, E(HP), then compute the variance of the two strategies, and then the standard deviations, Std(HP)). Who is right? You or the CFO?