A U.S. firm holds an asset in France and faces the following scenario: State 3 25% State 1 25% $ 1.85/€ € 1,500 $2,060 State 2 25% $ 1.75/€ € 1,400 $1,800 $ 1.65/€ € 1,300 $ 1,430 Probability Spot rate P* P 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. a. Compute the exchange exposure faced by the U.S. firm. Exposure State 4 25% $ 1.55/€ € 1,200 $1,210 b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance

A U.S. firm holds an asset in France and faces the following scenario: State 3 25% State 1 25% $ 1.85/€ € 1,500 $2,060 State 2 25% $ 1.75/€ € 1,400 $1,800 $ 1.65/€ € 1,300 $ 1,430 Probability Spot rate P* P 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. a. Compute the exchange exposure faced by the U.S. firm. Exposure State 4 25% $ 1.55/€ € 1,200 $1,210 b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter15: International Corporate Governance And Control

Section: Chapter Questions

Problem 24QA

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