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. $\begin{array}{cccc}
\text { State } & \text { Probability } & P^{*} & S & S \times P^{*} \
1 & 1 / 3 & £ 980&\$ 1.40/£ & \$ 1,372\
2 & 1 / 3 & £ 1,000&\$ 1.50 /£ & \$ 1,500 \
3 & 1 / 3 & £ 1,070&\$ 1.60 /£ & \$ 1,712
\end{array}$ Which of the following statements is most correct?

Question

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. $\begin{array}{cccc}
\text { State } & \text { Probability } &  P^{*} & S & S \times P^{*} \
1 & 1 / 3 & £ 980&\$ 1.40/£ & \$ 1,372\
2 & 1 / 3 & £ 1,000&\$ 1.50 /£ & \$ 1,500 \
3 & 1 / 3 & £ 1,070&\$ 1.60 /£  & \$ 1,712
\end{array}$ Which of the following statements is most correct?

Quizplus · Accepted Answer

The correlation between the local currency price of the asset and the exchange rate is positive in this case, meaning that if the exchange rate increases, so does the local currency price of the asset, and vice versa. This creates exchange rate risk for the U.S. firm holding the asset.

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

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