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

question 93

Multiple Choice

A U.S.firm holds an asset in Great Britain and faces the following scenario: $$\begin{array} { l c c c } & \text { State } 1 & \text { State } 2 & \text { State } 3 \\\text { Probability } & 25 \% & 50 \% & 25 \% \\\hline \text { Spot rate } & \$ 2.50 / £ & \$ 2.00 / £ & \$ 1.60 / £ \\P ^ { * } & £ 1,800 & £ 2,250 & £ 2,812.50\end{array}$$ 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($/ $\le$ ) = $2/ $\le$ .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 above

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Definitions:

Sponges

Simple aquatic animals belonging to the phylum Porifera, characterized by porous bodies through which water flows.

Echinoderms

A phylum of marine animals including sea stars, sea urchins, and sand dollars, characterized by radial symmetry and a unique water vascular system.

Nematodes

A phylum of worm-like organisms known as roundworms, which can be found in various habitats and play diverse ecological roles.

Cnidarians

A phylum of aquatic invertebrate animals that includes corals, jellyfish, sea anemones, and hydras, characterized by their cnidocytes, stinging cells used for prey capture and defense.