State 3 25% A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate P* State 1 25% State 2 25% $ 1.35 per euro $ 1.25 per euro € 1,400 $ 1.15 per euro € 1,300 $ 1,600 $ 1,330 P € 1,500 $ 1,860 State 4 25% $ 1.05 per euro € 1,200 $ 1,110 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: a. Compute the exchange exposure faced by the U.S. firm. b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? 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? a. Exposure b. Variance C. Variance
State 3 25% A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate P* State 1 25% State 2 25% $ 1.35 per euro $ 1.25 per euro € 1,400 $ 1.15 per euro € 1,300 $ 1,600 $ 1,330 P € 1,500 $ 1,860 State 4 25% $ 1.05 per euro € 1,200 $ 1,110 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: a. Compute the exchange exposure faced by the U.S. firm. b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? 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? a. Exposure b. Variance C. Variance
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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Vijay
Transcribed Image Text:State 3
25%
A U.S. firm holds an asset in France and faces the following scenario:
Probability
Spot rate
P*
State 1
25%
State 2
25%
$ 1.35 per euro
$ 1.25 per euro
€ 1,400
$ 1.15 per euro
€ 1,300
$ 1,600
$ 1,330
P
€ 1,500
$ 1,860
State 4
25%
$ 1.05 per euro
€ 1,200
$ 1,110
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:
a. Compute the exchange exposure faced by the U.S. firm.
b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure?
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?
a.
Exposure
b.
Variance
C.
Variance
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