55 Forward versus option hedge Assume that interest rate parity exists. Today, the one-year interest rate in Japan is the same as the one-year interest rate in Australia. You use the international Fisher effect when forecasting how exchange rates will change over the next year. You will receive Japanese yen in one year.

You can hedge receivables with a one-year forward contract on Japanese yen or a one-year at-the-money put option contract on Japanese yen. If you use a forward hedge, will your expected Australian dollar cash flows in one year be higher than, lower than or the same as if you had used put options? Explain.