7. if a U.S. firm holds an asset in Great Britain and faces the following scenario: State: Probability State 1: 25% Spot Rate P* P $2.20/£ £3,000 $6,600 State 2: 50% $2.00/£ O $5,000, $5,000, $5,000. O $5,100, $5,000, $5,100. O $5,100, $5,100, $5,100. £2,500 $5,000 P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same The CFO runs a regression of the form P=a+bxS+e State 3: 25% $1.80/£ £2,000 $3,600 The regression coefficient is estimated as b=7500 Suppose the firm Sells £7,500 forward at the 1-year forward rate F₁($/£) = $2/£. Total value (i.e., net cash flows from hedging plus asset value) in state 1, 2, and 3 respectively will be
7. if a U.S. firm holds an asset in Great Britain and faces the following scenario: State: Probability State 1: 25% Spot Rate P* P $2.20/£ £3,000 $6,600 State 2: 50% $2.00/£ O $5,000, $5,000, $5,000. O $5,100, $5,000, $5,100. O $5,100, $5,100, $5,100. £2,500 $5,000 P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same The CFO runs a regression of the form P=a+bxS+e State 3: 25% $1.80/£ £2,000 $3,600 The regression coefficient is estimated as b=7500 Suppose the firm Sells £7,500 forward at the 1-year forward rate F₁($/£) = $2/£. Total value (i.e., net cash flows from hedging plus asset value) in state 1, 2, and 3 respectively will be
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:7. if a U.S. firm holds an asset in Great Britain and faces the following scenario:
State: Probability
Spot Rate
P*
P
State 1: 25%
$2.20/£
£3,000
$6,600
O $5,000, $5,000, $5,000.
State 2: 50%
$5,100, $5,000, $5,100.
$2.00/£
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The CFO runs a regression of the form P=a+bxS+e
$5,100, $5,100, $5,100.
£2,500
$5,000
State 3: 25%
$1.80/£
The regression coefficient is estimated as b-7500
Suppose the firm Sells £7,500 forward at the 1-year forward rate F₁($/£) = $2/£.
Total value (i.e., net cash flows from hedging plus asset value) in state 1, 2, and 3
respectively will be
£2,000
$3,600
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