Solution-Compute the exchange exposure faced by the us firm

Compute the exchange exposure faced by the us firm what is

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Reference no: EM13568473

A U.S. firm holds an asset in France and faces the following scenario:

	State 1	State 2	State 3	State
Probability	25%	25%	25%	25%
Spot rate	$1.20/€	$1.10/€	$1.00/€	$0.90/€
P*	€ 1,500	€ 1,400	€ 1,300	€ 1,200
P	$1,800	$1,540	$1,300	$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.

(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 the forward contract, what is the variance of the dollar value of the hedged position?

Reference no: EM13568473

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Compute the exchange exposure faced by the us firm what is

Reference no: EM13568473

Reference no: EM13568473

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