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Question 1 An Australian firm holds an asset in UK and faces the following scenario regarding its value next period: State 1 State 2 State

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Question 1 An Australian firm holds an asset in UK and faces the following scenario regarding its value next period: State 1 State 2 State 3 Probability 30% 40% 30% Spot Rate A$ 2.5900 A$ 1.8500 A$ 1.1100 P* 1,665.00 2,331.00 3,885.00 p*= price of the asset held by the Australian firm The CFO decides to hedge his exposure by selling forward the expected value of the pound. denominated cash flow at F1(A$/) = A$1.85/. As a result, = the firm now has a nearly perfect hedge. the firm now has a perfect hedge. none of the others O . the firm's exposure to the exchange rate is made worse by hedging. Question 1 An Australian firm holds an asset in UK and faces the following scenario regarding its value next period: State 1 State 2 State 3 Probability 30% 40% 30% Spot Rate A$ 2.5900 A$ 1.8500 A$ 1.1100 P* 1,665.00 2,331.00 3,885.00 p*= price of the asset held by the Australian firm The CFO decides to hedge his exposure by selling forward the expected value of the pound. denominated cash flow at F1(A$/) = A$1.85/. As a result, = the firm now has a nearly perfect hedge. the firm now has a perfect hedge. none of the others O . the firm's exposure to the exchange rate is made worse by hedging

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