Use the following information to answer the next five questions. A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/ $2.00/ $1.80/ P* 2,000 2,500 3,000 P $4,400 $5,000 $5,400 where, P* = Pound sterling price of the asset held by the U.S. firm P = dollar price of the same asset (a) What is the expected value of the investment in U.S. dollars? (b) What is the variance of the exchange rate? (c) What is the exposure coefficient (i.e. the regression coefficient beta)? (d) What is the volatility of the dollar value of the British asset [i.e. Var(P)]? (e) Var(e) represents the residual part of the dollar value variability that is independent of exchange rate movements. What is the Var(e)?
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