Suppose that you hold an asset in Paris that you may want to sell in one year. As an Australian resident, you are concerned with the dollar value of the land. Assume that if the French economy booms in the future, the asset will be worth 4,000, and one euro will be worth A$1.80. If the French economy slows down, on the other hand, the asset will be worth less, say, 3,000, but the euro will be stronger, say, $2.20/. You feel that the French economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability. (15 marks) Show your detailed a working for full marks of this question. a a. Estimate your exposure (b) to the exchange risk. (5 marks) b. Discuss how you can perfectly hedge your exchange risk exposure using an option contract. Suppose there exists both a call and a put option with 50 per contract and the strike price is A$2.00/. Discuss in detail your hedge strategy. Compare the overall risk before and after the hedging and describe your overall cash flows at each state of the world. (10 marks) Suppose that you hold an asset in Paris that you may want to sell in one year. As an Australian resident, you are concerned with the dollar value of the land. Assume that if the French economy booms in the future, the asset will be worth 4,000, and one euro will be worth A$1.80. If the French economy slows down, on the other hand, the asset will be worth less, say, 3,000, but the euro will be stronger, say, $2.20/. You feel that the French economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability. (15 marks) Show your detailed a working for full marks of this question. a a. Estimate your exposure (b) to the exchange risk. (5 marks) b. Discuss how you can perfectly hedge your exchange risk exposure using an option contract. Suppose there exists both a call and a put option with 50 per contract and the strike price is A$2.00/. Discuss in detail your hedge strategy. Compare the overall risk before and after the hedging and describe your overall cash flows at each state of the world. (10 marks)