A U.S. firm holds an asset in Great Britain and faces the following scenario: ...
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A U.S. firm holds an asset in Great Britain and faces the following scenario:
|
| 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 |
| |
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Which of the following would be an effective hedge?
A) Buy 2,500 forward at the 1-year forward rate, F1($/), that prevails at time zero.
B) Sell 7,500 forward at the 1-year forward rate, F1($/), that prevails at time zero.
C) Sell 25,000 forward at the 1-year forward rate, F1($/), that prevails at time zero.
D) none of the options
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