Question

A UK company has a factory in Europe. The company has projected five different scenarios that could occur over the next year. The CFO wants to know how exposed her company is to the euro.

	Probability	Spot (£/€)	P*(€)	P(£)
Scenario 1	0.15	0.862068966	2,000,000	1,724,138
Scenario 2	0.20	0.854700855	1,800,000	1,538,462
Scenario 3	0.25	0.869565217	1,500,000	1,304,348
Scenario 4	0.30	0.877192982	1,400,000	1,227,070
Scenario 5	0.10	0.909090909	1,200,000	1,090,909

What is this company’s exposure (i.e. beta)?

If you bought/sold euros forward to hedge, is it a good hedge (does it do a good job of lowering the variability of the asset priced in pounds)?

Answer 1

Solution

company Exposure

1)	2)Probability	3) P(E)	4) Probability*P(E)
S-1	0.15	1724138	258620.7	=258620.7*1= 258620.7
S-2	0.20	1538462	307692.4	= 307692.4*2 = 615384.8
S-3	0.25	1304348	326087	=326087*3= 978261
S-4	0.30	1227070	368121	=368121*4= 1472484
S-5	0.10	1090909	109090.9	=109090.9*5= 545454.5
		Total	1369612	3870205

Beta

3870205/1369612=

2.825767