Problem: A U.S. firm holds an asset in France and considers selling it in one year. The firm faces the following scenario of the future spot rate in one year:
|
|
State 1
|
State 2
|
State 3
|
State 4
|
|
Probability
|
25%
|
25%
|
25%
|
25%
|
|
Spot Rate ($/Euro)
|
1.2
|
1.1
|
1
|
0.9
|
|
P* (Euro)
|
1500
|
1400
|
1300
|
1200
|
|
P($)_
|
$1800
|
$1540
|
$1300
|
$1080
|
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.
1. The asset exposure faced by the U.S. firm is euro
2. The variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure is
3. If the U.S. firm hedges against this exposure using the forward contract, the firm should enter a ______ (Long/Short) position in the amount of euro ______ forward contract.
3. The variance of the dollar value of the hedged position is?