State 1 State 2 State 3

Probability 25% 50% 25%

Spot rate $ 2.20/ $ 2.00/ $ 1.80/

P* 3,000 2,500 2,000

P $ 6,600 $ 5,000 $ 3,600

P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset To begin, you run a regression of the form P = a + b S + e, where the regression coefficient b is the sensitivity dollar of the asset to exchange and is calculated as b.

a. Calculate the expected value (in USD) of the British asset in 12 months.

b. Calculate the expected spot exchange rate in 12 months.

c. Calculate the calculated value of the regression coefficient beta.

d. how would you would implement the hedge given the beta you calculated.