Evaluation of foreign currency

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Reference no: EM1315830

Computation of Foreign Currency - Hedging with forward contracts.

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	$1.20/€	$1.10/€	$1.00/€	$0.90/€

P^*	1500	1400	1300	1200

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: EM1315830

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