A U.S. firm holds an asset in Great Britain and faces the following scenario:
Probability State 1 (25%) State 2 (50%) State 3 (25%)
Spot rate $2.20/pound $2.00/pound $1.80/pound
P* 2,000 pounds 2,500 pounds 3,000 pounds
P $4,400 $5000 $5,400
P* = the pound price of the asset held by the U.S. firm
P = the dollar price of the same asset
Given the data provided, the expected value of the investment in U.S. dollars is _____ . (HINT: Use the probabilities provided for each state.)
a. $4,933
b. $4,950
c. $4,893
d. $5,000