Question

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 ($/Pound) 2.2 2.0 1.80 Asset value (P* in pound) 2000 2500 3000 Asset value (P in $) 4400 5000 5400 where, P* = Pound sterling price of the asset held by the U.S. firm P =dollar price of the same asset The variance of the exchange rate a. 0.02 b. 0.10 c. 0.01 d. none of the above

Answer 1

The answer is letter B.

Step-by-step explanation:

The mean is 2.03 =($2.5+ $2 + $1.6)/ 3 ; [0.25(2.5-2.03)²] + [0.5(2-2.03)²] + [0.25(1.6- 2.03)²] = 0.055225+0.00045 + 0.046225= 0.1019

Letter B = 010