Question

14. Jacobee Inc., a U.S. firm, holds an asset in Bulgaria and faces the following scenario:

State 1 State 2 State 3
Probability 25% 50% 25%
Spot rate $0.30 /BL $0.20 /BL $0.15 /BL
P* BL 2,000 BL 5,000 BL 3,000
P $600 $1,000 $450

where,
P* = Bulgarian Lev (BL) 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:

       $2,083.33
       $762.50
       $6,250.00
       $6,562.50

Continued from Question 14, the variance of exchange rate is

       0.001901
       0.0049
       0.0039
       0.002969

Continued from Question 14, what is the "exposure coefficient" (i.e., the regression coefficient b in the regression P = a + b x S + e)?

       1,289.8024
       ?52.6316
       13,657.2781
       -187.2583

Answer 1

14)

The expected value is given by:-

= P1 * Probability + P2 * Prbability + P3 * Probability

= 600 * 0.25 + 1000 * 0.5 + 450 * 0.25

= 150 + 500 + 112.5

= $762.5

Now for calculating variance we will first calculate mean of exchange rate:-

M = (0.3 + 0.2 + 0.15)/3 = 0.2167

Now varience is given by

So

This is the varience

Now

The regression coefficient is defined as the ratio of the covariance between the asset value and the exchange rate, to the variance of the spot rate. Mathematically it is defined as:

b = Cov (P,S) ÷ Var (S)

here we know the varience of spot rate from above calculation.

and

So

b = 1.11 / 0.003889

b = 285.7061

Please note that varience and covarience are calculated considering population mean.

Thank You!!