A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate p* State 1 25% $ 1.20/€ € 1,500 $1,800 State 2 25% $ 1.10/€ € 1,400 $1,540 State 3 25% State 4 25% $ 1.00/€ €1,300 $1,300 $ 0.90/€ € 1,200 $1,080 In the above table, P* is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. Exposure b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance 19 c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position? Variance

A U.S. firm holds an asset in France and faces the following scenario: Probability Spot rate p* State 1 25% $ 1.20/€ € 1,500 $1,800 State 2 25% $ 1.10/€ € 1,400 $1,540 State 3 25% State 4 25% $ 1.00/€ €1,300 $1,300 $ 0.90/€ € 1,200 $1,080 In the above table, P* is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. Exposure b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance 19 c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position? Variance

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability Spot rate p* P $ € $ 25 1.45 1,500 1,900 % /€ $ € $ 25 1.35 1,400 1,640 % /€ 25 $ 1.25 € 1,300 $1,350 % 25 /€ $ 1.15 € 1,200 $ 1,130 % /€ In the above table, P* is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position?
A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% Spot rate $1.28/€ $1.23/€ $1.18/€ $1.12/€ P * €1700 €1500 €1200 €1000 In the above table, P * is the euro price of the asset held by the U.S. firm.What is the variance of the spot rate (X.XXXXX)
A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% Spot rate $1.26/€ $1.24/€ $1.17/€ $1.12/€ P * €1800 €1400 €1300 €1100 In the above table, P * is the euro price of the asset held by the U.S. firm. What is the variance of the spot rate (X.XXXXX
A U.S. firm holds an asset in France and faces the following scenario: State 1 25% $ 2.10/€ State 2 25% State 3 25% $ 1.90/€ $ 2.00/€ € 1,400 € 1,500 € 1,300 $ 2,160 $ 1,900 $ 1,480 Probability Spot rate p* P In the above table, P* Is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. Exposure State 4 25% $ 1.80/€ € 1,200 $ 1,260 b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? Variance c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position? Variance
A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% Spot rate $1.28/€ $1.23/€ $1.18/€ $1.14/€ €1700 €1500 €1300 €1100 In the above table, P is the euro price of the asset held by the U.S. firm and P is the dollar price of the asset. Estimate the expected value of the spot rate (USD X.XXXX)
A U.S. firm holds an asset in France and faces the following scenario: State 1 25% Probability Spot rate. P* P State 2 25% a Exposure b. Variance C. Variance State 3 258 $ 2.20 per euro € 1,500 $ 2,200 In the above table, P is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. Required: a. Compute the exchange exposure faced by the U.S. firm. b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position? $ 2.10 per euro € 1,400 $ 1,940 State 4 25% $ 2.00 per euro € 1,300 $ 1,500 $ 1.90 per euro € 1,200. $ 1,280
A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% Spot rate $ 2.10 per euro $ 2.00 per euro $ 1.90 per euro $ 1.80 per euro P* € 1,500 € 1,400 € 1,300 € 1,200 P $ 2,160 $ 1,900 $ 1,480 $ 1,260 In the above table, P* is the euro price of the asset held by the U.S. firm and P is the dollar price of the asset. Required: Compute the exchange exposure faced by the U.S. firm. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position?
A U.S. firm holds an asset in France and faces the following scenario: State 1 State 2 State 3 State 4 Probability 25% 25% 25% 25% Spot rate $1.50/€ $1.40/€ $1.30 $1.20/€ P* €1,500 €1,400 €1,300 €1,200 P $1,920 $1,660 $1,360 $1,140 In the above table, P* is the euro price of the asset held by the U.S. firm and P is the dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position?
A U.S. firm holds an asset in Israel and faces the following scenario: Probability Spot rate Pº O121.971 12,898.00 1,289.80 State 1 O-52.6316 40% $ IS 0.30 /IS 1,000 State 2 35% $ IS 0.20 /IS 2,500 State 3 25% Where P= Israeli shekel (IS) price of the asset held by the U.S. firm. The "exposure" (i.e.. the regression coefficient beta) is $ 0.15 /IS IS 1.500
7. if a U.S. firm holds an asset in Great Britain and faces the following scenario: State: Probability Spot Rate P* P State 1: 25% $2.20/£ £3,000 $6,600 O $5,000, $5,000, $5,000. State 2: 50% $5,100, $5,000, $5,100. $2.00/£ P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset The CFO runs a regression of the form P=a+bxS+e $5,100, $5,100, $5,100. £2,500 $5,000 State 3: 25% $1.80/£ The regression coefficient is estimated as b-7500 Suppose the firm Sells £7,500 forward at the 1-year forward rate F₁($/£) = $2/£. Total value (i.e., net cash flows from hedging plus asset value) in state 1, 2, and 3 respectively will be £2,000 $3,600
es A U.S. firm holds an asset in Great Britain and faces the following scenario: raw Probability Spot rate P State 1 25% 1 $ 2.50 £ £1,800 $4,500 Multiple Choice State 2 50% $ 2.00 0.0200 £2,250 $4,500 The variance of the exchange rate is $ State 3 25% tA 1.60 £2,812.50 4,500 where, p* = Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset £
Suppose the current exchange rate between the US dollar (USD) and the euro (EUR) is 1 USD = 0.85 EUR. Additionally, assume that the expected rate of return on US assets is 8% and the purchasing price of a US asset is $ 100. Calculate the expected rate of return on this US asset in terms of euros. [5] How does the ability of international investors to quickly and easily switch between domestic and foreign assets impact the relationship between exchange rates and asset prices, particularly in terms of expected rates of return?

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