7. if a U.S. firm holds an asset in Great Britain and faces the following scenario:State: ProbabilitySpot RateP*PState 1: 25%$2.20/££3,000$6,600O $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. firmP = Dollar price of the same assetThe CFO runs a regression of the form P=a+bxS+e$5,100, $5,100, $5,100.£2,500$5,000State 3: 25%$1.80/£The regression coefficient is estimated as b-7500Suppose the firm Sells £7,500 forward at the 1-year forward rate F₁($/£) = $2/£.Total value (i.e., net cash flows from hedging plus asset value) in state 1, 2, and 3respectively will be£2,000$3,600

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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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A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $ 2.20 /£ $ 2.00 /£ $ 1.80 /£ P* £ 2,000 £ 2,500 £ 3,000 P $ 4,400 $ 5,000 $ 5,400 Find (a) the expected value of the exchange rate (b) the variance of the exchange rate (c) the covariance of the asset’s ($) price and (the exchange rate) (d) The "exposure" (i.e. the regression coefficient beta) faced by the firm as a result ( e) Find the cash flow in each of the three states if you implement your (forward) hedge at F1($/£) = $2/£.
A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate P* P State 1 25% State 2 25% State 3 25% $ 1.35 per euro € 1,500 $ 1.25 per euro € 1,400 $ 1.15 per euro € 1,300 $ 1,860 $ 1,600 $ 1,330 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
es A U.S. firm holds an asset in Great Britain and faces the following scenario: raw Probability Spot rate P State 1 25% 1 $ 2.50 £ £1,800 $4,500 Multiple Choice State 2 50% $ 2.00 0.0200 £2,250 $4,500 The variance of the exchange rate is $ State 3 25% tA 1.60 £2,812.50 4,500 where, p* = Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset £
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 $1.28/€ $1.23/€ $1.18/€ $1.14/€ €1700 €1500 €1300 €1100 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. Estimate the expected value of the spot rate (USD X.XXXX)
A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate P* P State 1 25% State 2 25% State 3 25% State 4 25% $ 1.20/€ € 1,500 $ 1,800 $ 1.10/€ € 1,400 $1,540 $ 1.00/€ € 1,300 $ 1,300 $ 0.90/€ € 1,200 $ 1,080 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. a. Compute the exchange exposure faced by the U.S. firm. Exposure b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance _ 19 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? Variance
A U.S. firm holds an asset in France and faces the following scenario: State 1 25% Probability Spot rate. P* P State 2 25% a Exposure b. Variance C. Variance State 3 258 $ 2.20 per euro € 1,500 $ 2,200 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. 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? $ 2.10 per euro € 1,400 $ 1,940 State 4 25% $ 2.00 per euro € 1,300 $ 1,500 $ 1.90 per euro € 1,200. $ 1,280
A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 25% 25% 25% Probability 25% Spot rate $1.26/€$1.24/€$1.17/€ P $1.12/€ €1800 €1400 €1300 €1100 In the above table, P is the euro price of the asset held by the U.S. firm. What is the variance of the spot rate (X.XXXXX)
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 $1.28/€ $1.23/€ $1.18/€ $1.12/€ P * €1700 €1500 €1200 €1000 In the above table, P * is the euro price of the asset held by the U.S. firm.What is the variance of the spot rate (X.XXXXX)
A U.S. firm holds an asset in France and faces the following scenario: State 1 25% $ 2.10/€ State 2 25% State 3 25% $ 1.90/€ $ 2.00/€ € 1,400 € 1,500 € 1,300 $ 2,160 $ 1,900 $ 1,480 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% $ 1.80/€ € 1,200 $ 1,260 b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? 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? Variance
A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability Spot rate p* P $ € $ 25 1.45 1,500 1,900 % /€ $ € $ 25 1.35 1,400 1,640 % /€ 25 $ 1.25 € 1,300 $1,350 % 25 /€ $ 1.15 € 1,200 $ 1,130 % /€ 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. 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 U.S. firm holds an asset in Great Britain and faces the following scenario: (13 points) State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $ 2.20 $ 2.00 $ 1.80 /£ P* £ 3,000 £ 2,500 £ 2,000 P $ 6,600 $ 5,000 $ 3,600 = P* Pound sterling price of the asset held by the U.S. firm == P = Dollar price of the same asset 1) Compute the expected value of P and S. 2) What is the covariance of P and S? 3) Identify the value of b in the regression of the form P = a + bxS+ e. 4) How can this company perform an effective hedge by using financial assets (e.g., forward contract)?
A U.S. firm holds an asset in Great Britain and faces the following scenario: State State 2 State 3 1 Probability 25% 50% 25% Spot rate $2.2/E $2/£ $1.8/E P" £3000 £2500 £2000 $6600 $5000 $3600 P where, P-Pound sterling price of the asset held by the U.S. firm P-Dollar price of the same asset The firm should the foreign currency risk. (buy/sell) forward of E at the prevailing 1-year forward price to hedge

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