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Forecast the dollar amount of profit or loss

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The U.S. three-month interest rate (unannualized) is 1.5%. The Australian three-month interest rate (unannualized) is 5%. A put option with a three-month expiration date on Australian dollars (A$) is available for a premium of $0.03 and a strike price of $0.76. The spot rate of the Australian dollar is $0.78.

Assume that you believe in International Fisher Effect (IFE).

a. Forecast the dollar amount of your profit or loss from buying a put option contract specifying A$200,000.

b. Forecast the USD received by A&M company which uses the put option to hedge against its 3 month receivables of A$ 200,000.

ANS: Please label a/b in your response to the two sub-questions respectively.

Reference no: EM132842708

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