Reference no: EM133160027

Question - You currently hold some French equity mutual funds, which you plan to sell in one year's time. As a Hong Kong investor, you care about the HK$ value of your investments. The French economy is currently in a recession. If the French economy remains in a recession in one year's time, your funds will worth €10,000 and the exchange rate will be HK$10/€; if the French economy worsens into a depression in one year's time, your funds will worth €8,000 and the exchange rate will be HK$8/€; if the French economy recovers in one year's time, your funds will worth €12,000 and the exchange rate will be HK$11/€. You believe that the probability for the French economy to remain in recession is equal to 0.5, the probability for the French economy to worsen into a depression is equal to 0.25, and the probability for the French economy to recover is equal to 0.25.

Required -

(a) What is the mean value (in €) of your French mutual funds in one year's time?

(b) What is the variance of the HK$ value of your French mutual funds in one year's time?

(c) To minimize the exchange rate exposure of your French mutual funds, should you buy or sell euros in the forward market? What is the amount of euros you should buy or sell?