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

question 43

Multiple Choice

A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{llccc}&\text { State 1}&\text { State 2}&\text { State 3}\\\text { Probability } & 25 \% & 50 \% & {25 \%} \\\text { Spot rate } & \$ 2.50 /£ & \$ 2.00 / £ & \$1.60 / £\\P^{*} & £ 1.800 & £ 2.250 & £ 2.812 .50\end{array}$ Where
P^* = Pound sterling price of the asset held by the U.S.firm
The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F₁($/£) = $2/£.As a result,

• A)the firm's exposure to the exchange rate is made worse.
• B)he has a nearly perfect hedge.
• C)he has a perfect hedge.
• D)none of the options

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