A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array} { l c c c } & \text { State } 1 & \text { State } 2 & \text { State } 3 \\\text { Probability } & 25 \% & 50 \% & 25 \% \\\hline \text { Spot rate } & \$ 2.50 / £ & \$ 2.00 / £ & \$ 1.60 / £ \\P ^ { * } & £ 1,800 & £ 2,250 & £ 2,812.50\end{array}$ Where P^* = Pound sterling price of the asset held by the U.S.firm
The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F₁($/ $\le$ ) = $2/ $\le$ .As a result

Question

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

\begin{array} { l c c c } & \text { State } 1 & \text { State } 2 & \text { State } 3 \\\text { Probability } & 25 \% & 50 \% & 25 \% \\\hline \text { Spot rate } & \$ 2.50 / £ & \$ 2.00 / £ & \$ 1.60 / £ \\P ^ { * } & £ 1,800 & £ 2,250 & £ 2,812.50\end{array}

Where P^* = Pound sterling price of the asset held by the U.S.firm
The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F₁($/

\le

) = $2/

\le

.As a result

Quizplus · Accepted Answer

The Answer of A U.S.firm holds an asset in Great Britain and faces the following scenario: $$\begin{array} { l c c c } & \text { State } 1 & \text { State } 2 & \text { State } 3 \ \text { Probability } & 25 \% & 50 \% & 25 \% \ \hline \text { Spot rate } & \$ 2.50 / £ & \$ 2.00 / £ & \$ 1.60 / £ \ P ^ { * } & £ 1,800 & £ 2,250 & £ 2,812.50 \end{array}$$ Where P^* = Pound sterling price of the asset held by the U.S.firm The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F₁($/$\le$)= $2/$\le$.As a result

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