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

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Finance

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

$

2.50

/

$

2.00

/

$

1.60

/

P*

1,800

2,250

2,812.50

P

$

4,500

$

4,500

$

4,500

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 25,000 forward at the 1-year forward rate, F1($/), that prevails at time zero.

C) Sell 2,278.13 forward at the 1-year forward rate, F1($/), that prevails at time zero.

D) none of the options

Answer & Explanation Solved by verified expert
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