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a U.S. firm holds an asset in Great Britain and faces the following scenario: (13...

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Accounting

a U.S. firm holds an asset in Great Britain and faces the following scenario: (13 points)

State 1

State 2

State 3

Probability

25%

50%

25%

Spot rate

$

2.20

/

$

2.00

/

$

1.80

/

P*

3,000

2,500

2,000

P

$

6,600

$

5,000

$

3,600

P* = Pound sterling price of the asset held by the U.S. firm

P = Dollar price of the same asset

1) Compute the expected value of P and S.

2) What is the covariance of P and S?

3) Identify the value of b in the regression of the form P = a + b S + e.

4) How can this company perform an effective hedge by using financial assets (e.g., forward contract)?

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