Part II: Problems 1. (20 points) A U.S. firm holds an asset in Israel and faces the following scenario: Probability Spot rate P* P State 1 25% $0.30/IS IS10,000 $3,000 State 2 50% $0.20/IS IS12,500 $2,500 State 3 25% $0.10/IS IS20,000 $2,000 where, P=Israeli shekel (IS) price of the asset held by the U.S. firm P = dollar price of the same asset (1) How much is the expected value of the investment in US Dollar? (2) How much is the expected value of the exchange rate? (3) How much is the economic exposure coefficient? (4) How much of the variance of the investment in US Dollar? (5) How much of this variance can not be removed from hedging? (6) Design your hedging strategy for the economic exposure. Suppose the forward price is $0.20/IS. Consider your payoff under the above three states of economy.