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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.
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