A US MNC tries to sell off its assets in France and retain US dollars back. Now
ID: 2793091 • Letter: A
Question
A US MNC tries to sell off its assets in France and retain US dollars back. Now the company is facing three scenarios, and the euro value of its French assets and the exchange rate under each scenario is indicated in the table below.
(a) Please answer the dollar value of the company’s French assets under each case.
(b) Please solve for the economic exposure of the company’s French assets. In other words, how does the change of exchange rate affect the dollar value of the assets. To answer this question, you need to build a model. (Dollar value of French Assets = alpha + beta* Exchange Rate). And then solve for beta. (Use the statistics function of your calculator. Choose linear regression for calculation).
State Probability Euro Value Exchange Rate Dollar Value Scenario 1 1/3 €900 $1.35/€ Scenario 2 1/3 €1,000 $1.50/€ Scenario 3 1/3 €1,100 $1.65/€Explanation / Answer
a) Please find below Dollar Value for each case-
State
Probability
Euro Value
Exchange Rate
Dollar Value
Scenario 1
1/3
€900
$1.35/€
900*1.35 = 1215
Scenario 2
1/3
€1,000
$1.50/€
1000*1.50 = 1500
Scenario 3
1/3
€1,100
$1.65/€
1100*1.65 = 1815
b) Let Dollar value be D, therefore , D = alpha + beta* Exchange Rate
Now, take Scenario 1, We get
1215 = alpha + beta* (1.35)______(1)
Taking Scenario 2, We get
1500 = alpha + beta*(1.5) ________(2)
Solving both the above Equations, We get beta = 1900
State
Probability
Euro Value
Exchange Rate
Dollar Value
Scenario 1
1/3
€900
$1.35/€
900*1.35 = 1215
Scenario 2
1/3
€1,000
$1.50/€
1000*1.50 = 1500
Scenario 3
1/3
€1,100
$1.65/€
1100*1.65 = 1815
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