Question 6 (6 points): Economic Exposure (Chapter 9)

A U.S. firm holds an asset in France and faces the following scenario

In the above table, P^* is the euro price of the asset held by the U.S. firm and P is the dollar price of the asset. Compute the exchange rate exposure faced by the U.S. firm. Explain your answer.

State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% Spot rate $1.20/ $1.10/ $1.00/ $0.90/ P* 1500 1400 1300 1200 P $1,800 $1,540 $1,300 $1,080