Vijay State 325%A U.S. firm holds an asset in France and faces the following scenario:ProbabilitySpot rateP*State 125%State 225%$ 1.35 per euro$ 1.25 per euro€ 1,400$ 1.15 per euro€ 1,300$ 1,600$ 1,330P€ 1,500$ 1,860State 425%$ 1.05 per euro€ 1,200$ 1,110In 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.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 hedgedposition?a.Exposureb.VarianceC.Variance

b. Variance:To calculate the variance of the dollar price of the asset if the U.S. firm remains…

Answered: State 3 25% A U.S. firm holds an asset…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 30QA

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