In the wake of the North American Free Trade Agreement, the firm All- American Exports, Inc. has begun exporting baseball caps and gloves to Mexico. Suppose that All-American is subject to a tax of 30...

In the wake of the North American Free Trade Agreement, the firm All- American Exports, Inc. has begun exporting baseball caps and gloves to Mexico. Suppose that All-American is subject to a tax of 30 percent when it earns profits less than or equal to usd 10 million and 40 percent on the part of profits that exceeds usd 10 million. The table below shows the company's profits in usd under three exchange rate scenarios, when the firm has hedged its income and when it has left its income unhedged. The probability of each level of the exchange rate is also given.

(a) Compute the taxes that All-American must pay under each scenario.

(b) What are All-American's expected taxes when it hedges its income?

(c) What are All-American's expected taxes when it does not hedge its income?