A U.S.firm holds an asset in Great Britain and faces the following scenario:
$\begin{array}{l}\begin{array} { l } &\text { State 1}\\\text { Probability } & 25 \% \\\text { Spotrate } & \$ 2.20 / £ \\P^{*} & £ 3,000 \\P & \$ 6,600\end{array}\begin{array} { l } \text { State 2}&\text { State 3}\\50 \% & 25 \% \\\$ 2.00/£ & \$ 1.80 / £ \\£ 2,500 & £ 2,000 \\\$ 5,000 & \$ 3,600\end{array}\end{array}$
where,
P^* = Pound sterling price of the asset held by the U.S.firm
P = Dollar price of the same asset
The expected value of the investment in U.S.dollars is

Question

A U.S.firm holds an asset in Great Britain and faces the following scenario:

\begin{array}{l}\begin{array} { l } &\text { State 1}\\\text { Probability } & 25 \% \\\text { Spotrate } & \$ 2.20 / £ \\P^{*} & £ 3,000 \\P & \$ 6,600\end{array}\begin{array} { l } \text { State 2}&\text { State 3}\\50 \% & 25 \% \\\$ 2.00/£ & \$ 1.80 / £ \\£ 2,500 & £ 2,000 \\\$ 5,000 & \$ 3,600\end{array}\end{array}

where,
P^* = Pound sterling price of the asset held by the U.S.firm
P = Dollar price of the same asset
The expected value of the investment in U.S.dollars is

Quizplus · Accepted Answer

The expected value is calculated by multiplying each state's dollar price by its probability and summing the results: (0.25 * $6,600) + (0.50 * $5,000) + (0.25 * $3,600) = $5,050.

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