Suppose a U Which of the Following Statements Is Most Correct?
A)The Firm

question 53

Multiple Choice

Suppose a U.S.firm has an asset in Britain whose local currency price is random.For simplicity,suppose there are only three states of the world and each state is equally likely to occur.The future local currency price of this British asset (P*) as well as the future exchange rate (S) will be determined,depending on the realized state of the world. $$\begin{array} { | c c l l l | } \hline \text { State } & \text { Probability } & P ^ { * } & S & S \times P ^ { * } \\\hline \mathbf { 1 } & 1 / 3 & £ 1,000 & \$ 1.40 / £ & \$ 1,400 \\\hline \mathbf { 2 } & 1 / 3 & £ 933 & \$ 1.50 / £ & \$ 1,400 \\\hline \mathbf { 3 } & 1 / 3 & £ 875 & \$ 1.60 / £ & \$ 1,400 \\\hline\end{array}$$ Which of the following statements is most correct?

• A)The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated.
• B)The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated.
• C)The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound.
• D)Since randomness is involved, no hedging is possible.

Grasp the significance of diversification in reducing portfolio risk.

Know the measures of risk including variance, standard deviation, and the coefficient of variation.

Understand the impact of risk aversion on investment decisions and market outcomes.

Recognize the relevance of the Capital Asset Pricing Model (CAPM) in evaluating investments.

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Definitions:

Change-supportive Perceptions

The way individuals view and interpret change within an organization, often affecting their readiness and support for the change.

Seldom Resist Change

This phrase implies an unusual tendency or situation where individuals or groups infrequently oppose or challenge alterations in their environment or standard procedures.

Moderate Identity Gap

The state in which there is a discernible but not overwhelming difference between an individual's personal identity and their perceived social identity.

Acceptance of Change

The willingness or ability of individuals and organizations to adapt to new conditions, innovations, or transformations.