A USfirm Holds an Asset in Great Britain and Faces the the Following

question 12

Multiple Choice

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 variance of the exchange rate is:

• A)0.0200
• B)0.10
• C)0.002
• D)none of the options

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Definitions:

Calculate

To determine mathematically the amount or number of something.

Operating Statement

A financial document, also known as an income statement, which shows a company's revenues, expenses, and profits or losses over a specific period.

Gross Margin

A company's total sales revenue minus its cost of goods sold, indicating the financial health and profitability of a product or business.

Direct Labor

Workers or employees who are directly involved in the production of goods or services.