A U.S firm owns a piece of land in Israel. The price (in unit of million) of the land is expected to be:
|
State of Economy
|
Probability
|
Exchange Rate
|
PIS
|
PIS
|
|
State 1
|
25%
|
$0.30/IS
|
IS 2,000
|
$600
|
|
State 2
|
50%
|
$0.20/IS
|
IS 5,000
|
$1,000
|
|
State 3
|
25%
|
$0.15/IS
|
IS 3,000
|
$450
|
Note: PIS is the Israeli shekel (IS) price of the land.
Questions:
(1) Calculate the U.S firm's asset exposure.
(2) How to hedge its asset exposure in the forward market?
(3) Can forward hedging completely eliminate the firm's asset exposure? Explain.
(4) How much of the dollar value variability is attributable to exchange rate uncertainty?
(5) Assume the Israeli shekel (IS) price of the land stays at IS, 3000, Can forward hedging completely eliminate the firmAc€?cs asset exposure in this case? Explain.