Suppose you are a purchasing manager of a company in Europe. You just signed a contract with a supplier in the UK for 1,000 items at a cost of 57,000. At the current exchange rate it will cost you Euros 30,000 or 30 per item. Your transportation, insurance, advertising and selling costs will be about 17 per item. The market selling price for this type of product in Europe is 60. The shipment of goods from the UK is scheduled to occur in three months and payment for the shipment need not be made until that time.

You expect one of three possible outcomes three months later: (i) The exchange rate does not change, with 60% probability. The Euro is 'weakened' and the British Pound has appreciated to a new value of 1.70 to the Euro, with 20% probability. (ii) The Euro is 'strengthened' and the British Pound has depreciated to a new value of 2.20 to the Euro, with 20% probability