A U.S.firm holds an asset in Israel and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 0.30 / LS \\ P^{*} & LS 2,000 \\ P & \$ 600 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 0.20/LS & \$ 0.15 / LS \\ £ 5,000 & £ 3,000 \\ \$ 1,000 & \$ 4,50 \end{array} \end{array}$ where, P* = Israeli shekel (IS)price of the asset held by the U.S.firm P = Dollar price of the same asset The variance of the exchange rate is:

A) 0.001901 B) 0.002969 C) 0.0039 D) 0.0049 A) 0.001901 B) 0.002969 C) 0.0039 D) 0.0049

A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 2.20 / £ \\ P^{*} & £ 2,000 \\ P & \$ 4,400 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 2.00/£ & \$ 1.80 / £ \\ £ 2,500 & £ 3,000 \\ \$ 5,000 & \$ 5,400 \end{array} \end{array}$ where, P* = Pound sterling price of the asset held by the U.S.firm P = Dollar price of the same asset The expected value of the investment in U.S.dollars is

A) $4,950. B) $3,700. C) $2,112.50. D) none of the options A) $4,950. B) $3,700. C) $2,112.50. D) none of the options

A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 2.20 / £ \\ P^{*} & £ 1,800 \\ P & \$ 4,500 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 2.00/£ & \$ 1.60 / £ \\ £ 2,250 & £ 2,812.50 \\ \$ 4,500 & \$ 4,500 \end{array} \end{array}$ where, P* = Pound sterling price of the asset held by the U.S.firm P = Dollar price of the same asset The variance of the exchange rate is

A) 0.0200 B) 0.1019 C) 0.0020 D) none of the options A) 0.0200 B) 0.1019 C) 0.0020 D) none of the options

Suppose a U.S.firm has an asset in Italy whose local currency price is random.For simplicity,suppose there are only three states of the world and each state is equally likely to occur.The future local currency price of this asset (P*)as well as the future exchange rate (S)will be determined,depending on the realized state of the world. $\begin{array}{cccc} \text { State } & \text { Probability } & P^{*} & S & S \times P^{*} \\ 1 & 1 / 3 & £ 1,000&\$ 1.40/£ & \$ 1,400\\ 2 & 1 / 3 & £ 933 &\$ 1.50 /£ & \$ 1,400 \\ 3 & 1 / 3 & £ 875&\$ 1.60 /£ & \$ 1,400 \end{array}$ Assume that you choose to "hedge" this asset by selling forward the expected value of the euro denominated cash flow at F1($/£)= $1.50/€.Calculate your cash flows in each of the possible states.

A) $1,400,$1,400,$1,400 B) $1,496.6,$1,400,$1,306.40 C) $1,404,$1,404.$1,404 D) none of the options A) $1,400,$1,400,$1,400 B) $1,496.6,$1,400,$1,306.40 C) $1,404,$1,404.$1,404 D) none of the options

A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 2.20 / £ \\ P^{*} & £ 3,000 \\ P & \$ 6,600 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 2.00/£ & \$ 1.80 / £ \\ £ 2,500 & £ 2,000 \\ \$ 5,000 & \$ 3,600 \end{array} \end{array}$ 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 b2[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 b2[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 b2[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 b2[Var(S)] and VAR(e)are 125,000 ($)2 and −127,500 ($)2 respectively. A) Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2[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 b2[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 b2[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 b2[Var(S)] and VAR(e)are 125,000 ($)2 and −127,500 ($)2 respectively.