SFirm Holds an Asset in Italy and Faces the Following

question 94

Multiple Choice

S.firm holds an asset in Italy and faces the following scenario: $$\begin{array} { l c c c } & \text { State 1 } & \text { State 2 } & \text { State 3 } \\\text { Probability } & 30 \% & 40 \% & 30 \% \\\hline \text { Spot rate } & \$ 2.50 & \$ 1.50 & \$ 0.90 \\P ^ { * } & € 1,350.00 & € 2,250.00 & € 3,750.00\end{array}$$ Where P^* = Euro 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 euro denominated cash flow at F₁($/ $\le$ ) = $1.50/€.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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