What is the variance of the dollar price of this asset

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Reference no: EM131909780

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%	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.. ( 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.

Reference no: EM131909780

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