Question

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 $ 1.20 /€ $ 1.10 /€ $ 1.00 /€ $ 0.90 /€ P* € 1,500 € 1,400 € 1,300 € 1,200 P $ 1,800 $ 1,540 $ 1,300 $ 1,080 In the above table, P* is the euro price of the asset held by the U.S. firm and P is the dollar Compute the exchange exposure faced by the U.S. firm.

Answer 1

Exchange exposure refers to the risk faced by a firm due to changes in exchange rates and can be calculated by determining the potential changes in the value of the asset based on different exchange rate scenarios and probabilities.

Step-by-step explanation:

Exchange exposure refers to the risk faced by a firm due to changes in exchange rates. It measures the impact of exchange rate fluctuations on the value of the firm's assets and liabilities denominated in foreign currencies.

In this scenario, the U.S. firm holds an asset in France. The exchange exposure can be calculated by determining the potential changes in the dollar value of the asset based on the different exchange rate scenarios and their respective probabilities.

To calculate the exchange exposure for each state, we can multiply the probability of each state with the change in dollar value of the asset. Finally, we sum up these values to get the total exchange exposure faced by the U.S. firm.