Based on the following information about the future possible exchange rates and the value of your foreign assets,you have computed Var(S)= 0.00666667 and Cov(P,S)= 12.If you use the appropriate forward hedge,what will be the value of your hedged position in a situation when the future spot exchange rate is 1.4$/£?
State Prob.P* S($/£)P( = SP*)
1 1/3 £1000 1.4 $1,400
2 1/3 £1,000 1.5 $1,500
3 1/3 £1,100 1.6 $1,760

Question

Quizplus · Accepted Answer

Computation of the Exposure Coefficient:Exposure coefficient = Var(s)/Cov(P,S)= 0.00666667/12= $1,800Dollar proceeds from Hedge = Exposure Coefficient * (F - S)= $1,800 * (1.5 - 1.4) = $180Value of hedge = proceeds from Hedge + Price of the asset on that date= $180 + $1,400 = $1,580

Based on the Following Information About the Future Possible Exchange