35) 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* £ 2,000 £ 2,500 £ 3,000
P $ 4,400 $ 5,000 $ 5,400

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 is:

A) 0.0200
B) 0.10
C) 0.002
D) none of the options

Answer: A
2] + [0.5 (2 - 2)2] + [0.25
2] = 0.01 + 0 + 0.01 = 0.02
Topic: Operating Exposure: Definition
36) 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* £ 2,000 £ 2,500 £ 3,000
P $ 4,400 $ 5,000 $ 5,400

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

P = Dollar price of the same asset

The "exposure" (i.e. the regression coefficient beta) is

Hint: Calculate the expression .

A) 25,000
B) 2,500

D) none of the options

Answer: C
Expl 2] +
2 2] = 0.01 + 0 + 0.01 = 0.02 Next, find the covariance, where the
mean = $4,933.33 = ($4,400 + $5,000 + $5,400) / 3. Solve,

Topic: Operating Exposure: Definition

37) 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* £ 2,000 £ 2,500 £ 3,000
P $ 4,400 $ 5,000 $ 5,400

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 conclusions are correct?

A) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
B) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 2 respectively.
D) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 2 respectively.

Answer: D
Topic: Operating Exposure: Definition
38) 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* £ 2,000 £ 2,500 £ 3,000
P $ 4,400 $ 5,000 $ 5,400

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) Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), 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

Answer: B
Topic: Operating Exposure: Definition

39) 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

The expected value of the investment in U.S. dollars is

A) $5,050
B) $3,700
C) $2,112.50
D) none of the options

Answer: A
Explanation: $6,600 (0.25) + $5,000 (0.5) + $3,600 (0.25) = $5,050
Topic: Operating Exposure: Definition
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40) 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

The variance of the exchange rate is

A) 0.0200
B) 0.10
C) 0.002
D) none of the options

Answer: A
2 2] + [0.25
2] = 0.01 + 0 + 0.01 = 0.02
Topic: Operating Exposure: Definition
41) 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

The "exposure" (i.e. the regression coefficient beta) is

Hint: Calculate the expression .

A)7,500
B) 2,500

D) none of the options

Answer: A
Explana 2] +
2 2] = 0.01 + 0 + 0.01 = 0.02 Next, find the covariance, where the
mean = $5,066.67 = ($6,600 + $5,000 + $3,600) / 3. Solve, 0.25 [($

0 + 73.3335 = 150. Exposure = 150 / 0.02 = $7,500.

Topic: Operating Exposure: Definition
42) 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 conclusions are correct?

A) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 1,125,000 ($)2 and 2,500 ($)2 respectively.
B) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 2 respectively.
D) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 2 respectively.

Answer: A
Topic: Operating Exposure: Definition
43) 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) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), 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

Answer: A
Topic: Operating Exposure: Definition

44) 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

The expected value of the investment in U.S. dollars is:

A) $5,050
B) $4,500
C) $2,112.50
D) none of the options

Answer: B
Explanation: $4,500 (0.25) + $4,500 (0.5) + $4,500 (0.25) = $4,500
Topic: Operating Exposure: Definition
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45) 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

The variance of the exchange rate is

A) 0.0200
B) 0.1019
C) 0.0020
D) none of the options

Answer: B
2 2]
2] = 0.055225 + 0.00045 + 0.046225 = 0.1019
Topic: Operating Exposure: Definition
46) 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

The "exposure" (i.e. the regression coefficient beta) is

Hint: Calculate the expression .

A)7,500
B) 2,500

D) none of the options

Answer: D

2.03)2 2 2] = 0.055225 + 0.00045 + 0.046225 = 0.1019.

Next, find the covariance, where the mean = $4,500 = ($4,500 + $4,500 + $4,500) / 3. Solve,

Topic: Operating Exposure: Definition

47) 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 conclusions are correct?

A) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[VAR(S)] and VAR(e) are 0 ($)2 and 0 ($)2 respectively.
B) None of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[VAR(S)] and VAR(e) are 0 ($)2 and 0 ($)2 respectively.
C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[VAR(S)] and VAR(e) are 125,000 ($)2 2
respectively.
D) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[VAR(S)] and VAR(e) are 125,000 ($)2 2
respectively.

Answer: B
Topic: Operating Exposure: Definition
48) 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) Sell £2,278.13 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), 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

Answer: D
Topic: Operating Exposure: Definition

49) A U.S. firm holds an asset in Israel and faces the following scenario:

State 1 State 2 State 3

Probability 25% 50% 25%
Spot rate $ 0.30/IS $ 0.20/IS $ 0.15/IS
P* IS 2,000 IS 5,000 IS 3,000
P $ 600 $ 1,000 $ 4,50

where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
P = Dollar price of the same asset

The expected value of the investment in U.S. dollars is:

A) $2,083.33
B) $762.50
C) $6,250.00
D) $6,562.50

Answer: B
Explanation: $600 (0.25) + $1,000 (0.5) + $450 (0.25) = $762.50
Topic: Operating Exposure: Definition
50) A U.S. firm holds an asset in Israel and faces the following scenario:

State 1 State 2 State 3

Probability 25% 50% 25%
Spot rate $ 0.30/IS $ 0.20/IS $ 0.15/IS
P* IS 2,000 IS 5,000 IS 3,000
P $ 600 $ 1,000 $ 4,50

where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
P = Dollar price of the same asset

The variance of the exchange rate is:

A) 0.001901
B) 0.002969
C) 0.0039
D) 0.0049

Answer: B
2] +
2 2] = 0.001914 + 0.000078 + 0.000976 = 0.002969
Topic: Operating Exposure: Definition
51) A U.S. firm holds an asset in Israel and faces the following scenario:

State 1 State 2 State 3

Probability 25% 50% 25%
Spot rate $ 0.30/IS $ 0.20/IS $ 0.15/IS
P* IS 2,000 IS 5,000 IS 3,000
P $ 600 $ 1,000 $ 4,50

where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
P = Dollar price of the same asset

The "exposure" (i.e., the regression coefficient beta) is

Hint: Calculate the expression .

A) 52.6316
B) 1,289.80
C) 12,898.00
D) none of the options

Answer: A
Topic: Operating Exposure: Definition
52) A U.S. firm holds an asset in Israel and faces the following scenario:

State 1 State 2 State 3

Probability 25% 50% 25%
Spot rate $ 0.30/IS $ 0.20/IS $ 0.15/IS
P* IS 2,000 IS 5,000 IS 3,000
P $ 600 $ 1,000 $ 4,50

where,
P* = Israeli shekel (IS) price of the asset held by the U.S. firm
P = Dollar price of the same asset

Which of the following conclusions are correct?

A) Most of the volatility of the dollar value of the Israeli asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
B) Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
C) Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 8.22 ($)2 and 59,211 ($)2, respectively.
D) Most of the volatility of the dollar value of the Israeli asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 8.22 ($)2 and 59,211 ($)2 respectively.

Answer: C
Topic: Operating Exposure: Definition
53) A U.S. firm holds an asset in Israel and faces the following scenario:

State 1 State 2 State 3

Probability 25% 50% 25%
Spot rate $ 0.30/IS $ 0.20/IS $ 0.15/IS
P* IS 2,000 IS 5,000 IS 3,000
P $ 600 $ 1,000 $ 4,50

where,
P* = Israeli shekel (IS) 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) Sell 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero.
B) Buy 53 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time zero.
C) Sell 12,898 Israeli shekels forward at the 1-year forward rate, F1($/IS), that prevails at time
zero.
D) none of the options

Answer: B
Topic: Operating Exposure: Definition
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