A U.S. firm holds an asset in France and faces the following scenario: State 2 25% Probability Spot rate. P State 1 25% a. Exposure b. Variance State 3 25% $ 2.20 per euro $ 2.10 per euro € 1,400 € 1,500 $ 2,200 $ 1,940 In the above table, P is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. Required: 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 a forward contract, what is the variance of the dollar value of the hedgec position? State 4 25% $ 1.90 per euro € 1,200 $ 1,280 $ 2.00 per euro € 1,300 $1,500

A U.S. firm holds an asset in France and faces the following scenario: State 2 25% Probability Spot rate. P State 1 25% a. Exposure b. Variance State 3 25% $ 2.20 per euro $ 2.10 per euro € 1,400 € 1,500 $ 2,200 $ 1,940 In the above table, P is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. Required: 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 a forward contract, what is the variance of the dollar value of the hedgec position? State 4 25% $ 1.90 per euro € 1,200 $ 1,280 $ 2.00 per euro € 1,300 $1,500

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 30QA

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