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If Fleur de France chooses not to hedge its foreign exchange

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a. If Fleur de France chooses not to hedge its foreign exchange risk, what is the expected value of its after-tax income on the unhedged project?
b. If Fleur de France chooses to hedge its foreign exchange risk, what is the expected value of its after-tax income on the hedged project?
c. How much does Fleur de France gain by hedging?

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SOLUTION
a. If Fleur de France chooses not to hedge its foreign exchange risk, what is the expected
value of its after-tax income on the unhedged project?

If the project is unhedged, two cases are likely to happen:
? Spot rate is ?1.54/£ (55% probability):
Convert revenue to ?: ?1.54/£ × £20 million = ?30.8 M.
Before tax profit = ?30.8 - ?30 = ?0.8M
After tax income = ?0.8*(1-0.45) = ?0.44 M = ?440,000
? Spot rate is ?1.48/£ (45% ...

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