Question 3 A U.S. firm holds an asset in Great Britain and faces the following scenario: Probability Sport Rate P* State

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Question 3 A U S Firm Holds An Asset In Great Britain And Faces The Following Scenario Probability Sport Rate P State 1 (92.56 KiB) Viewed 8 times

Question 3 A U.S. firm holds an asset in Great Britain and faces the following scenario: Probability Sport Rate P* State 1 30% $1.3/£ £2500 Required 6 State 2 50% $1.2/£ £3500 where, P = Pound sterling price of the asset held by the U.S. firm CONTINUES NEXT PAGE State 3 20% $1.1/£ £3200 a) What is the expected value of the investment in U.S. dollars? d) Estimate your exposure to the exchange risk. [10 marks] b) Calculate the variance of the exchange rate, i.e. Var(S). (Keep all decimals) [5 marks] c) Calculate the covariance between the dollar value of the asset and the exchange rate, i.e. Cov(P,S). [10 marks] [5 marks] [Total 30 marks]