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problem: A United State firm holds an asset in France and faces the following scenario

 

 

 

 

 

State 1

State 2

 State 3

 State 4

 

 

 

 

 

Probability

25%

25%

25%

25%

 

 

 

 

 

Spot rate

 $1.20/€

 $1.10/€

 $1.00/€

 $0.90/€

 

 

 

 

 

P*

1500

1400

1300

1200

 

 

 

 

 

P

$1,800

$1,540

$1,300

$1,080

In the above table, P* is the euro price of the asset held by the United State firm and P is the dollar price of the asset.

[A] find out the exchange exposure faced by the United State firm.

[B] find out the variance of the dollar price of this asset if the United State firm remains unhedged against this exposure?

[C] If the United State firm hedges against this exposure using the forward contract, determine the variance of the dollar value of the hedged position?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M920400

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