A U.S. firm holds an asset in France and faces the following scenario: State 3 25% State 1 25% $ 2.10/€ €1,500 State 2 25% $ 2.00/€ € 1,400 $1,900 $ 1.90/€ € 1,300 $ 2,160 $ 1,480 Probability Spot rate In the above table, P* Is the euro price of the asset held by the U.S. firm and Pls 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 3 25% State 1 25% $ 2.10/€ €1,500 State 2 25% $ 2.00/€ € 1,400 $1,900 $ 1.90/€ € 1,300 $ 2,160 $ 1,480 Probability Spot rate In the above table, P* Is the euro price of the asset held by the U.S. firm and Pls 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

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 40QA

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