Question

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

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

Probability State 1 (25%) State 2 (50%) State 3 (25%)
Spot rate $2.20/pound $2.00/pound $1.80/pound
P* 2,000 pounds 2,500 pounds 3,000 pounds
P $4,400 $5000 $5,400

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

P = the dollar price of the same asset

Given the data provided, the expected value of the investment in U.S. dollars is _____ . (HINT: Use the probabilities provided for each state.)

A. $4,950

B.

$4,933

C.

$4,893

D.

$5,000
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Answer #1

Solution :

The expected value of the investment in U.S. dollars is = $ 4,950.

Thus the solution is option A = $ 4,950

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution :

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