Question
A U.S. 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 U.S. firm and P is the dollar price of the asset.. ( give explanation)
(a) Compute the exchange exposure faced by the U.S. firm. ( give explanation)
(b) What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure?. ( give explanation)
If the U.S. firm hedges against this exposure using the forward contract, what is the variance ofthe dollar value of the hedged position?
( give explanation)
Provide an explanation for the result of your calculation.explanation please give in detail.