Based on the Following Information About the Future Possible Exchange

question 28

Multiple Choice

Based on the following information about the future possible exchange rates and the value of your foreign assets,you have computed Var(S) = 0.00666667 and Cov(P,S) = 12.If you use the appropriate forward hedge,what will be the value of your hedged position in a situation when the future spot exchange rate is 1.4$/£?
State Prob.P* S($/£) P( = SP*)
1 1/3 £1000 1.4 $1,400
2 1/3 £1,000 1.5 $1,500
3 1/3 £1,100 1.6 $1,760

• A) $1500
• B) $1553
• C) $1580
• D) $1620

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Definitions:

Company Stock

Equity shares issued by a corporation representing ownership in the company.

Incremental Value

The additional value created by undertaking a particular action, project, or investment compared to not doing so.

Actual Cost

The real, total expenditure incurred in acquiring an asset, completing a project, or executing a transaction, including all relevant expenses.

Synergistic Benefits

The enhancements or improvements in performance, value, or effectiveness resulting from the merger or collaboration of two entities or systems.