Question
if a U.S. firm holds an asset in Great Britain and faces the following scenario: State: Probability State 1: 25% State 2: 50% State 3:
if a U.S. firm holds an asset in Great Britain and faces the following scenario:
| State: Probability | State 1: 25% | State 2: 50% | State 3: 25% |
| Spot Rate | $2.20/ | $2.00/ | $1.80/ |
| P* | 3,000 | 2,500 | 2,000 |
| P | $6,600 | $5,000 | $3,600 |
P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset The CFO runs a regression of the form P=a+bS+e
The regression coefficient is estimated as b=7500 Suppose the firm Sells 7,500 forward at the 1-year forward rate F1($/) = $2/. Total value (i.e., net cash flows from hedging plus asset value) in state 1, 2, and 3 respectively will be
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Entrepreneurial Finance
Authors: J. Chris Leach, Ronald W. Melicher
6th edition
1305968352, 978-1337635653, 978-1305968356
