Question
A U.S. firm has a subsidiary in Great Britain and faces the following scenario:
|
Probability |
Spot Rate |
C* |
C |
Proceeds from Fwd. contract |
Dollar value of hedged position |
| State 1 |
40% |
$2.50/£ |
£2,000 |
|
|
|
| State 2 |
60% |
$2.30/£ |
£2,500 |
|
|
|
a. Compute the dollar value of the hedged position and fill in the blanks in the table above.
b. Calculate the variance of the un-hedged position.
c. If you hedge, what is the variance of the dollar value of the hedged position?