State Probability =1/3

Revenues (P*) GBP =980,000

USD/GBP 1.40 GBP 1,000,000

USD/GBP 1.50 3

GBP 1,070,000

USD/GBP 1.60

Compare the standard deviation of the hedged position under your strategy and under the CFOs strategy. (Hint: compute first the expected value of the revenues of the two strategies, E(HP), then compute the variance of the two strategies, and then the standard deviations, Std(HP)). Who is right? You or the CFO?