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Question
A U.S. firm holds an asset in France and faces the following scenario:
State 1
State 2
State 3
State 4
Probability
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.. ( give explanation)
(a) Compute the exchange exposure faced by the U.S. firm. ( give explanation)
(b) What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure?. ( give explanation)
If the U.S. firm hedges against this exposure using the forward contract, what is the variance ofthe dollar value of the hedged position?
( give explanation)
Provide an explanation for the result of your calculation.explanation please give in detail.
What return do investors require on this stock?
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