A U.S.firm holds an asset in Israel and faces the following scenario:
$\begin{array}{l}\begin{array} { l } &\text { State 1}\\\text { Probability } & 25 \% \\\text { Spotrate } & \$ 0.30 / LS \\P^{*} & LS 2,000 \\P & \$ 600\end{array}\begin{array} { l } \text { State 2}&\text { State 3}\\50 \% & 25 \% \\\$ 0.20/LS & \$ 0.15 / LS \\£ 5,000 & £ 3,000 \\\$ 1,000 & \$ 4,50\end{array}\end{array}$
where,
P^* = Israeli shekel (IS) 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 Israel and faces the following scenario:

\begin{array}{l}\begin{array} { l } &\text { State 1}\\\text { Probability } & 25 \% \\\text { Spotrate } & \$ 0.30 / LS \\P^{*} & LS 2,000 \\P & \$ 600\end{array}\begin{array} { l } \text { State 2}&\text { State 3}\\50 \% & 25 \% \\\$ 0.20/LS & \$ 0.15 / LS \\£ 5,000 & £ 3,000 \\\$ 1,000 & \$ 4,50\end{array}\end{array}

where,
P^* = Israeli shekel (IS) 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

To calculate the expected value of the investment in U.S. dollars, we multiply the dollar price of the asset in each state by the probability of that state occurring and then sum these products. State 1: $0.25 \times \$600 = \$150$State 2: $0.50 \times \$1,000 = \$500$State 3: $0.25 \times \$450 = \$112.50$Adding these together: $ \$150 + \$500 + \$112.50 = \$762.50$

A USFirm Holds an Asset in Israel and Faces the Following