A US firm owns a product plant in the industrial outskirts of Seville in Spain, which it may sell in the near future when the plans for the closure of the product line take place. The board of directors of the US firms have been given the following forecasts regarding the value of the plant in the next year: State 1 State 2 State 3 State 4 Probability S($/€) € value of the plant € 3.2m 0.25 0.25 0.25 0.25 $ 1.20/€ $ 1.25/€ € 3.6m $ 1.30/€ € 4.1m $ 1.35/€ € 4.5m
A US firm owns a product plant in the industrial outskirts of Seville in Spain, which it may sell in the near future when the plans for the closure of the product line take place. The board of directors of the US firms have been given the following forecasts regarding the value of the plant in the next year: State 1 State 2 State 3 State 4 Probability S($/€) € value of the plant € 3.2m 0.25 0.25 0.25 0.25 $ 1.20/€ $ 1.25/€ € 3.6m $ 1.30/€ € 4.1m $ 1.35/€ € 4.5m
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 22P
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(i) Calculate the amount of the exchange exposure faced by the US firm.
(ii) Calculate the variance of the $ value of the plant if the US firm remains unhedged against this exchange risk exposure.
(iii) Calculate the variance of the $ value of the plant if the US firm chooses to hedge against this exchange risk exposure.
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