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Please use the following information for Q1-Q4. 1. A U.S. firm holds an asset in Great Britain and faces the following scenario: State Probability P

Please use the following information for Q1-Q4.

1. A U.S. firm holds an asset in Great Britain and faces the following scenario:

State

Probability

P*

S

P

1

1/3

3,000

$

2.20/

$6,600

2

1/3

2,550

$

2.00/

$5,100

3

1/3

2,000

$

1.80/

$3,600

where P* = Pound sterling price of the asset held by the U.S. firm and P = Dollar price of the same asset.

The mean of the investment in U.S. dollars (P) is

a. $3,700

b. $5,100

c. $2,112.50

2. The variance of the exchange rate (S) is

a. 0.02

b. 0.002

c. 0.10

3. The asset exposure (i.e. the regression coefficient b) is

a. 2,500

b. 2,500

c. 7,500

4. Which of the following would be an effective hedge?

a. Sell 7,500 forward.

b. Buy 2,500 forward.

c. Buy 7,500 forward.

d. Sell 2,500 forward.

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