A Canadian firm holds an asset in France and faces the following scenario:
$\begin{array} { l l l l }
\hline & \text { State 1 } & \text { State 2 } & \text { State 3 } \
\hline \text { Probability } & 20 \% & 50 \% & 30 \% \
\text { Spot rate } & \$ 1.6 / \text { euro } & \$ 1.65 / \text { euro } & \$ 1.70 / \text { euro } \
\begin{array} { l }
\text { Price of the euro- } \
\text { asset }
\end{array} & \text { euro } 2,000 & \text { euro } 3,000 & \text { euro 4,000 }
\end{array}$
-The variance of the exchange rate is:

Question

A Canadian firm holds an asset in France and faces the following scenario:
$\begin{array} { l l l l } 
\hline & \text { State 1 } & \text { State 2 } & \text { State 3 } \
\hline \text { Probability } & 20 \% & 50 \% & 30 \% \
\text { Spot rate } & \$ 1.6 / \text { euro } & \$ 1.65 / \text { euro } & \$ 1.70 / \text { euro } \
\begin{array} { l } 
\text { Price of the euro- } \
\text { asset }
\end{array} & \text { euro } 2,000 & \text { euro } 3,000 & \text { euro 4,000 }
\end{array}$
-The variance of the exchange rate is:

Quizplus · Accepted Answer

The expected spot rate is calculated as $ (0.2 \times 1.6) + (0.5 \times 1.65) + (0.3 \times 1.7) = 1.655 $. The variance is calculated as $ 0.2 \times (1.6 - 1.655)^2 + 0.5 \times (1.65 - 1.655)^2 + 0.3 \times (1.7 - 1.655)^2 = 0.001225 $.

A Canadian Firm Holds an Asset in France and Faces