A U.S. firm holds an asset in France and faces the following scenario: State 3 25% State 1 25% $ 1.85/€ € 1,500 $2,060 State 2 25% $ 1.75/€ € 1,400 $1,800 $ 1.65/€ € 1,300 $ 1,430 Probability Spot rate P* P In the above table, P is the euro 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. Exposure State 4 25% $ 1.55/€ € 1,200 $1,210 b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance
A U.S. firm holds an asset in France and faces the following scenario: State 3 25% State 1 25% $ 1.85/€ € 1,500 $2,060 State 2 25% $ 1.75/€ € 1,400 $1,800 $ 1.65/€ € 1,300 $ 1,430 Probability Spot rate P* P In the above table, P is the euro 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. Exposure State 4 25% $ 1.55/€ € 1,200 $1,210 b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance
Chapter15: International Corporate Governance And Control
Section: Chapter Questions
Problem 24QA
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Question
Q-h
![A U.S. firm holds an asset in France and faces the following scenario:
State 3
25%
State 1
25%
$ 1.85/€
€ 1,500
$2,060
State 2
25%
$ 1.75/€
€ 1,400
$ 1.65/€
€ 1,300
$ 1,800
$ 1,430
Probability
Spot rate
P*
P
Exposure
State 4
25%
$ 1.55/€
€ 1,200
$ 1,210
In the above table, P is the euro 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.
Check my work
Variance
b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this
exposure?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9bbfa52c-dccf-4585-ad99-ccd712830a2f%2Fb97a288c-db75-4402-8f6a-34db1dcfd822%2Fuyejalh_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A U.S. firm holds an asset in France and faces the following scenario:
State 3
25%
State 1
25%
$ 1.85/€
€ 1,500
$2,060
State 2
25%
$ 1.75/€
€ 1,400
$ 1.65/€
€ 1,300
$ 1,800
$ 1,430
Probability
Spot rate
P*
P
Exposure
State 4
25%
$ 1.55/€
€ 1,200
$ 1,210
In the above table, P is the euro 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.
Check my work
Variance
b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this
exposure?
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