Question

A U.S. firm holds an asset in Israel and faces the following scenario in Israeli Shaekel (IS): Probability Case 1 Case 2 Case 3 25% 50% 25% Spot Price ($/IS)0.3000 ($/IS)0.2000 ($/IS)0.1500 Israeli Shaekel price of asset held by U.S. Firm IS2000 IS5000 IS3000 U.S. Dollar price of the same asset $600 $1000 $450 What is the Exposure (Regression Coefficient Beta) Coefficient? Hint: Calculate the expression : covariance of the U.S. dollar price of the Israeli asset divided by the variance of the ($/Israeli Shaekel) exchange rate.

a)-52.6316

b) 1,289.80

c)12,898.00

d) None of the above

Answer 1

Option A -52.6316

1.Computation of Exposure Coefficient:

a. Cov(P,S) = 0.25 × ($600 – $762.50) × ($0.30 – $0.2125) + 0.50× ($1000 – $762.50) × ($0.20 – $0.2125) + 0.25($450 – $762.50)*($0.15 – $0.2125)= -3.5547 - 1.4844 + 4.8828

Cov(P,S)= -0.1563

b. VAR(S) = 0.25($0.30 – $0.2125)2+ 0.50($0.20 – $0.2125)2+ 0.25($0.15 – $0.2125)2= 0.001914 + 0.000078 + 0.000976= 0.002968

Exposure Coefficient = Cov(P,S) / Variance(P) = -0.1563 / 0.002968

Exposure Coefficient = Cov(P,S) / Variance(P) = -52.6316