Question
Suppose you are an Australian investor who has an asset in France. You forecast that there are three possible states of the world. The future
Suppose you are an Australian investor who has an asset in France. You forecast that there are three possible states of the world. The future local currency price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world, as shown in the table below.
State | Probability | P*() | S ($/) | P ($) |
1 | 1/3 | 1,333.05 | 1.8754 | $2,500 |
2 | 1/3 | 1,435.54 | 1.7415 | $2,500 |
3 | 1/3 | 1,517.45 | 1.6475 | $2,500 |
Suppose you hedge this exposure by selling forward the amount of equal to the beta coefficient at the forward rate F = 1.7245 $/. Calculate the cash flows of the hedged position in each of the possible states.
Select one:
a. $710.81, $824.31, $921.06
b. $2,298.84, $2,475.60, $2,616.84
c. $2,500, $2,500, $2,500
d. none of the options
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