Question 3 A U.S. firm holds an asset in Great Britain and faces the following scenario: 6 Probability Sport Rate P* State 1 30% $1.3/ 2500 Required State 2 50% $1.2/ 3500 where, P* = Pound sterling price of the asset held by the U.S. firm CONTINUES NEXT PAGE State 3 20% $1.1/ 3200 a) What is the expected value of the investment in U.S. dollars? d) Estimate your exposure to the exchange risk. [10 marks] b) Calculate the variance of the exchange rate, i.e. Var(S). (Keep all decimals) [5 marks] c) Calculate the covariance between the dollar value of the asset and the exchange rate, i.e. Cov(P,S). [10 marks] [5 marks] [Total 30 marks]