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Compute the dollar value of the hedged position and fill in

Question

A U.S. firm has a subsidiary in Great Britain and faces the following scenario:

	Probability	Spot Rate	C^*	C	Proceeds from Fwd. contract	Dollar value of hedged position
State 1	40%	$2.50/£	£2,000
State 2	60%	$2.30/£	£2,500

a. Compute the dollar value of the hedged position and fill in the blanks in the table above.

b. Calculate the variance of the un-hedged position.

c. If you hedge, what is the variance of the dollar value of the hedged position?

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