Question
Sensitivity analysis conducted by Canamine Inc. showed that in one year, the US dollar values of the company's British assets (P) can take one of
Sensitivity analysis conducted by Canamine Inc. showed that in one year, the US dollar values of the company's British assets (P) can take one of the three possible values.
In the worst case scenario the exchange rate will be 1.4$/ and the value of assets will be $1400.
In the moderate case scenario, the exchange rate will be 1.5$/ and the value of assets will be $1500.
In the best case scenario, the exchange rate will be 1.6$/ and the value of assets will be $1760.
All three scenarios are equally likely.
To reduce the variability in the values Canamine decided to fully hedge its asset exposure by selling GBP() forward contracts. Find the expected dollar value of Canimine's hedged portfolio if the one year forward rate is F=1.5$/.
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