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 $ 2.10 per euro $ 2.00 per euro $ 1.90 per euro $ 1.80 per euro P* € 1,500 € 1,400 € 1,300 € 1,200 P $ 2,160 $ 1,900 $ 1,480 $ 1,260 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. Required: Compute the exchange exposure faced by the U.S. firm. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? 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?
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 $ 2.10 per euro $ 2.00 per euro $ 1.90 per euro $ 1.80 per euro P* € 1,500 € 1,400 € 1,300 € 1,200 P $ 2,160 $ 1,900 $ 1,480 $ 1,260 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. Required: Compute the exchange exposure faced by the U.S. firm. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? 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?
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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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 | $ 2.10 | per euro | $ 2.00 | per euro | $ 1.90 | per euro | $ 1.80 | per euro |
| P* | € 1,500 | € 1,400 | € 1,300 | € 1,200 | ||||
| P | $ 2,160 | $ 1,900 | $ 1,480 | $ 1,260 |
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.
Required:
- Compute the exchange exposure faced by the U.S. firm.
- What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure?
- 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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