A U.S. firm holds an asset in France and faces the following scenario: State 1 25% State 2 State 3 25% 25% $ 1.20/€ €1,500 $ 1.10/€ $ 1.00/€ €1,400 (1,300 $1,540 $1,300 $1,800 Probability Spot rate: P Exposure In the above table, P is the eure price of the asset held by the U.S. firm and Pis the dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. = State 4 25% $ 0.90/€ Variance €1,200 $1,080 b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? I Variance c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position?

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.