A US MNC tries to sell off its assets in France and retain US dollars back. Now
ID: 3061845 • 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.
Please answer the dollar value of the company’s French assets under each case.
State
Probability
Euro Value
Exchange Rate
Dollar Value
Scenario 1
1/3
€800
$1.35/€
900*1.35=1,215
Scenario 2
1/3
€1,100
$1.50/€
1100*1.50=1,650
Scenario 3
1/3
€1,600
$1.70/€
1600* 1.70=2,720
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.
State
Probability
Euro Value
Exchange Rate
Dollar Value
Scenario 1
1/3
€800
$1.35/€
900*1.35=1,215
Scenario 2
1/3
€1,100
$1.50/€
1100*1.50=1,650
Scenario 3
1/3
€1,600
$1.70/€
1600* 1.70=2,720
Explanation / Answer
For scenario 1
Given
Dollar value =1215
Exchange rate=1.35/euro
Equation
1215=alpha+beta*1.35
Scenario 2
Equation:
1650=alpha+beta*1.5
Scenario 3
2720=alpha+beta*1.7
Since we have 2 unknowns and 3 equations we can choose any 2 equations to solve for alpha and beta
2720=alpha+beta*1.7
1215=alpha+beta*1.35
Subtracting we get
1505=0.35beta
beta=4300
substituting in the equation we get
2720=alpha+4300*1.7
alpha=-4590
Hence the equation
Dollar value =4300* Exchange rate-4590
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