Let X be a random variable with a finite number of finite outcomes occurring with probabilities p respectively. The expected value of X is defined as:

E(X) = p1.X1 + p2.X2 +p3,X3 + where p1 +p2 + p3 + = 1

Since E(X) the expected value is the weighted sum of the X values, with the probabilities p as the weights

EV = {P(Xi)Xi}

It also indicates the probability-weighted average of all possible values. Expected value is a commonly used financial concept. In finance, it indicates the anticipated value of an investment in the future. By determining the probabilities of possible scenarios, one can determine the EV of the scenarios

Business applications:

Interest rate

Investment portfolio

Profitability scenarios

Exchange rates

Application: composite exchange rates.

Currently in Lebanon, in 2021, US $ exchange rates are :

1 US$ = 1,500 LL formal contracts

1 US$ = 3,900 LL on bank deposits

1 US$ = 14,500 LL in open market

What is the total expected rate for a bread bakery:

Raw Materials: flour $ = 1,500 LL Central bank 60% of imported inputs

Sugar, yeast, plastic $ = 3,900 LL private bank 10% of imported inputs

Equipment O & M $ = 14,50000 LL fresh cash 30% of imported inputs

Total imported inputs: 60+10+30= 100%

Expected exchange rate:

1,500 x 0.6 +3,900 x 0.1 +14,500 x 0.3 =7,000 LL per US $

for bread bakery

Repeat calculation for a university, a restaurant, and a taxi

Note exchange rates apply only to imported inputs.