Suppose you are a German investor. You just acquired Catch, an Australian online business.

You are concerned with the EUR value of your foreign investment

As an economist, you estimate 3 scenarios for the future, as described in the table below:

Scenario Probability Forecast exchange rate (/A$) Forecast asset value (in AUD)

1 0.25 1.8517AUD 350,000.00

2 0.3 1.8901AUD 500,000.00

3 0.45 1.9102AUD 710,000.00

(a) Estimate your exposure to the exchange risk.[6 MARKS]

(b)How would you hedge this exposure? Suppose the forward rate is 1.8895 EUR/AUD. Calculate the EUR value of the hedged portfolio under each of the scenarios above[4 MARKS]

IN YOUR CALCULATION, KEEP 4 DECIMAL POINTS FOR THE EXCHANGE RATES, AND NO DECIMAL POINTS FOR CURRENCY NUMBERS.