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ABC is a U . S . firm that holds some stocks in the United Kingdom and faces three different scenarios in one year's time:
ABC is a US firm that holds some stocks in the United Kingdom and faces three different scenarios in one year's time: With probability, the spot exchange rate will be $ and the pound price of the asset will be ; with probability, the spot exchange rate will be $ and the pound price of the asset will be ; with probability, the spot exchange rate will be $ and the pound price of the asset will be
a points What is the mean value in US dollars of the British stocks?
b points What is the covariance between the US dollar value of the British stocks and the spot exchange rate?
c points To fully hedge the exchange rate exposure of the British stocks, should the US firm buy or sell pounds in the forward market? And what is the amount in pounds the US firm should buy or sell in the forward market?
d points What is the percentage of the total variance of the British stocks in US dollars that cannot be removed by hedging at the amount found in part c
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