A US firm holds an asset in Great Britain and faces the following scenario

# A us firm holds an asset in great britain and faces

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41) A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate \$ 2.20/£ \$ 2.00/£ \$ 1.80P*£ 3,000 £ 2,500 £ 2,000P\$ 6,600 \$ 5,000 \$ 3,600where, P*= Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset The "exposure" (i.e. the regression coefficient beta) is Hint: Calculate the expression . A)7,500 B) 2,500 C) 2,500 D) none of the options Answer: A Explanation: First, find the variance. The mean is 2 = (\$2.2 + \$2 + \$1.8) / 3; [0.25 (2.2 2)2] + [0.5 (2 2)2] + [0.25 (1.8 2)2] = 0.01 + 0 + 0.01 = 0.02 Next, find the covariance, where the mean = \$5,066.67 = (\$6,600 + \$5,000 + \$3,600) / 3. Solve, 0.25 [(\$6,600 \$5,066.67) × (2.2 2)] + 0.5 [(\$5,000 \$5,066.67) × (2 2)] + 0.25 [(\$3,600 \$5,066.67) × (1.8 2)] = 76.6665 + 0 + 73.3335 = 150. Exposure = 150 / 0.02 = \$7,500. Topic: Operating Exposure: Definition
42) A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate \$ 2.20/£ \$ 2.00/£ \$ 1.80 P * £ 3,000 £ 2,500 £ 2,000 P \$ 6,600 \$ 5,000 \$ 3,600 where, P * = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset Which of the following conclusions are correct? A) Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b 2 [Var( S )] and VAR( e ) are 1,125,000 (\$) 2 and 2,500 (\$) 2 respectively. B) Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange risk because b 2 [Var( S )] and VAR( e ) are 236,717 (\$) 2 and 493,751 (\$) 2 respectively. C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange risk because b 2 [Var( S )] and VAR( e ) are 125,000 (\$) 2 and 127,500 (\$) 2 respectively. D) Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b 2 [Var( S )] and VAR( e ) are 125,000 (\$) 2 and 127,500 (\$) 2 respectively. Answer: A Topic: Operating Exposure: Definition
43) A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate \$ 2.20/£ \$ 2.00/£ \$ 1.80P*£ 3,000 £ 2,500 £ 2,000P\$ 6,600 \$ 5,000 \$ 3,600where, P*= Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset Which of the following would be an effective hedge?

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